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(Answered) Managing risk and evaluating a swap between companies


"1. Companies manage risk in may ways. Which of the following is NOT one of them.;- Use derivative contracts to reduce risk;- Transfer the function that produces the risk to a third party;- none of the above;- Minimize the magnitude of loss associated with adverse event;- Transfer the risk to an insurance company;2. Two companies are evaluating a possible swap. Company A can issue floating-rate debt at LIBOR + 1%, and it can issue fixed rate debt at 9%. Company B can issue floating-rate debt at LIBOR + 1.5%, and it can issue fixed-rate debt at 9.4%. If A issues floating-rate debt and B issues fixed-rate debt, and then they engage in the following swap: A will make a fixed 7.95% payment to B, and B will make a floating-rate payment equal to LIBOR to A. Which of the following statements is correct?;-The swap is advantageous to B, but not to A;- The swap is not advantageous to either A or B;- none of the above;- The swap is advantageous to A, but not to B;- The swap is advantageous to both A and B;3. ""The June Treasury bond futures contract has a quoted price of 102'12. Are current market interest rates higher or lower than the standardized rate on a futures contract?;- higher, because the contract is selling at a discount;- lower, because the contract is selling at a premium;- higher, because the contract is selling at a premium;- None of the above answers is correct;- more information is required to answer this question;4. The June Treasury bond futures contract has a quoted price of 102'12. What is the current value of one contract in dollars?;- none of the above;- 90,180;- 102,375;- 90,563;- 102,120;5. The June Treasury bond futures contract has a quoted price of 102'12. What is the current value of one contract in dollars?;- 5.80%;- 3.05%;- none of the above;- 2.90%;- 5.85%;6. The December Treasury bond futures contract has a quoted price of 95'18 and the implied interest rate is 3.2% (semiannual). If annual interest rates go up by 1.00 percentage point, what is;- none of the above;- $76,939;- $95,523;- $69,591;- $85,504;7. Six months ago, a December Treasure bond futures contract had a quoted price of 95'16. Now, the quoted price is 99'4. What is the gain or loss on the contract?;- none of the above;- Gain of $3625;- Loss, but cannot determine amount;- Loss of $3625;- Gain, but cannot determine amount;8. Which of the following are ways risk management can be used to increase the value of a firm?;- none of the above;- risk management will allow managers to defer income;- risk management will not affect taxes.;- risk management will change the capital structure of the company;9. Two basic types of hedges involving the futures markets are long hedges and short hedges. Which of the following is correct;- all of the above;- none of the above;- both long and short hedges involve buying futures contracts;- a long hedge involves buying futures contracts;- a short hedge involves buying futures contracts;- both long and short hedges involve selling futures contracts;10. Which of the following is correct;- A speculator who buys or sells futures contracts has an offsetting position in the spot market;- A speculator who sells futures contracts believes the price will increase;- A speculator who buys or sells futures contracts takes little risk;- none of the above;- A speculator who sells futures contracts believes the price will decrease;Attachments;questions.docx"
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Managing risk and evaluating a swap between companies

 


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