Financial Management Principals And Applications 11th Edition Sheridan Titman, John D Martin, Arthur J Keown - Solutions

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What are swap contracts and how are they used in the management of interest rate risk?
What are the advantages and disadvantages of using forwards versus exchange-traded futures contracts in implementing a risk management strategy designed to address the problem of commodity price risk?
Flow can forward contracts be used as a risk management tool?
What is the role of insurance in managing the risks that a firm faces?
What is corporate risk management?
(Interest rate swap) The Prince Racket Company manufactures a line of tennis and racket ball equipment. The firm recently entered into a loan agreement for $20 million that carries a floating rate of interest equal to LIBOR plus 100 basis points (one percent). The loan has a 5-year maturity and
(Interest rate swap) Marx and Winter, Inc. operates a chain of retail clothing stores throughout the Midwestern part of the U.S. The firm recently entered into a loan agreement for $20 million that carries a floating rate of interest equal to LIBOR plus 50 basis points (one-half percent). The loan
(Related to Checkpoint 20.3 on page 670) (Call option valuation) You’ve just been introduced to the Black-Scholes option pricing model and want to give it a try, and would like to use it to calculate the value of a call option on TriHawk stock. Currently, TriHawk’s common stock is selling for
(Related to Checkpoint 20.3 on page 670) (Call option valuation) Consider the following call option:• the current price of the stock on which the call option is written is $20.00;• the exercise or strike price of the call option is $18.00;• the maturity of the option is 90 days or .25
(Hedging commodity price risk) Minelli Enterprises uses large amounts of copper in the manufacture of ceiling fans. The firm has been very concerned about the detrimental impact of rising copper prices on its earnings and has decided to hedge the price risk associated with its next quarterly
(Calculating put option payouts) Currently a put contract with an exercise price of$5 on a share of Milybe Aerospace’s common stock is selling for (that is, its premium is) $1. What would the profit or loss graph (similar to Figure 20.7) look like for this option? In drawing this graph, assume
(Put option payouts) Draw a profit or loss graph (similar to Figure 20.7) for a put contract with an exercise price of $45 for which a $5 premium is paid. You may assume that the option is being evaluated on its expiration date. Identify the break-even price of the underlying stock. What are the
(Calculating call option payouts) Currently a call contract with an exercise price of$10 on a share of List Aerospace’s common stock is selling for (that is, its premium is)$2. What would the profit or loss graph (similar to that in Figure 20.7) look like for this option? In drawing this graph,
(Related to Checkpoint 20.2 on page 666) (Call option payouts) Draw a profit or loss graph (similar to that in Figure 20.7) for a call contract with an exercise price of $50 for which a $5 premium is paid. You may assume that the option is being evaluated on its expiration date. Identify the
(Margin requirements and marking to market) Discuss how the exchange requirements that mandate traders to put up collateral in the form of a margin requirement and to use this account to mark their profits or losses for the day serve to eliminate credit or default risk.
(Related to Checkpoint 20.1 on page 656) (Hedging with forward ccontracts) The Specialty Chemical Company operates a crude oil refinery located in New Iberia, LA.The company refines crude oil and sells the by-products to companies that make plastic bottles and jugs. The firm is currently planning
(Forward contract payout) Repeat Problem 20-1, but this time draw the profit or loss graph from the perspective of the individual who sold (is short) the forward contract.
(Forward contract payout) Construct a delivery date profit or loss graph similar to Figure 20.2 for a long position in a forward contract with a delivery price of $65.Analyze the profit or loss for values of the underlying asset ranging from $40 to $80.
Chemical plants rely upon crude oil as the base material for the manufacture of a whole host of products. How might such a firm hedge the risk of a price increase in the cost of crude oil spanning the next 12 months of its operations?
What is a swap contract? How are swap contracts used to hedge interest rate risk?
Define a call option and contrast it with a put option.
What is a futures contract?
What are the limitations of the use of forward contracts to construct a hedge against price risk? How does a futures exchange control for these limitations?
Describe how forward contracts can be used to hedge the risk of fluctuating commodity prices for firms that must purchase them in the future.
What is a forward contract and how does it typically differ from an exchange-traded futures contract?
(Related to The Business of Life: Do You Need Life Insurance on page 654) In the box feature titled The Business ofLife: Do you need life insurance? what are some common sense guidelines that can be used to answer this question?
Firms regularly use insurance as a means of managing their risk exposure. What are some of the types of risks that are typically transferred to insurance companies through the use of insurance contracts?
What is the risk management policy followed by the Chesapeake Energy Corporation(CHK) with respect to the price of oil and gas it receives for its future production?
A firm’s cash flows are risky for a number of reasons. Identify and discuss five sources of risk or volatility in firm cash flows.
Define the term risk management.
(Related to Regardless of Your Major: Welcome to a Risky World on page 650) In the Regardless ofYour Major feature the need to engage in risk management is linked to the day-to-day activities of firm employees from multiple functional areas including operations, marketing, and accounting. What are
Define a swap contract and describe how it can be used to manage risk.
What are the six factors that determine the value of an option contract?
Define and contrast the following types of financial derivatives. options, futures, and forwards.
What is meant by the term financial derivative contract?
What are the limitations of forward contracts as tools for managing risk?
What is a forward contract? Contrast a forward contract with a spot contract.
Describe the primary types of risk that a firm might face.
What are the five steps in the risk management process?
Compute the Canadian dollar/yen spot rate from the data in the preceding table.
You own $10,000. The dollar rate in Tokyo is 216.6752.The yen rate in New York is given in the preceding table.Are arbitrage profits possible? Set up an arbitrage scheme with your capital. What is the gain in dollars?
Compute the indirect quote for the spot and forward Canadian dollar contract.
An American business pays $20,000, $5,000, and$15,000 to suppliers in Japan, Switzerland, and Canada, respectively. Flow much, in local currencies, do the suppliers receive?
An American business needs to pay(a) 15,000 Canadian dollars, (b) 1.5 million yen, and(c) 55,000 Swiss francs to businesses abroad, What are the dollar payments to the respective countries?
What does interest rate parity refer to?Use the following data in your response to the remaining questions:
What does the term arbitrage profits mean?
What new problems and factors are encountered in international as opposed to domestic financial management?
(Related to Checkpoint 19.3 on page 636) (International capital budgeting) An American firm is considering a new project in the country of Geeblaistan. This new project will produce the following cash flows measured in BUAs, the currency of Geeblaistan, which are expected to be repatriated to the
(Related to Checkpoint 19.3 on page 636) (International capital budgeting) Assume you are working for a firm based in America that is considering a new project in the country of Tambivia. This new project will produce the following cash flow's measured in TABs (the currency of Tambivia), which are
(Purchasing-power parity) If a new Samsung Blu-Ray machine costs ¥4,000 in Japan, and the current spot rate is ¥.104/$, how much should this machine cost in the United States?
(Purchasing-power parity) If a new iMac costs $1,400 and the spot rate for euros is€.76/$, what is the price in euros for the iMac?
(Interest rate parity) On August 8, 2008, the three-month risk-free rate of interest in the U.S. was 3.75% and it was 3% in Japan. If the spot exchange rate were .009074, what would you expect the forward exchange rate to be? How does this estimate compare to the 3-month forward exchange rate found
(Interest rate parity) On August 8, 2008 the six-month risk-free rate of interest in Switzerland was 4%. If the spot exchange rate for dollars for Swiss francs is 0.9252 and the six-month forward exchange rate is 0.9270, what would you expect the U.S. sixmonth risk-free rate to be?
(Related to Checkpoint 19.2 on page 628) (Determining the percent-per-annum premium or discount) You are in need of Swiss (Switzerland) francs in six months, but before entering a forward contract to buy them, you would like to know their premium or discount from the existing spot rate. Calculate
(Foreign exchange arbitrage) You own $10,000. The dollar rate in Tokyo is 216.6752£. The yen rate in New York is given in the previous table. Are arbitrage profits possible? Set up an arbitrage scheme with your capital. What is the gain (loss) in dollars?'
(Bid, ask, and forward rates) The spreads on the contracts as a percent of the asked rates are 4 percent for yen, 3 percent for Canadian dollars, and 6 percent for Swiss francs. Show, in a table similar to the previous one, the bid rates for the different spot and forward rates.
(Converting currencies) An American business pays $20,000, $5,000, and $15,000 to suppliers in Japan, Switzerland, and Canada, respectively. How much, in local currencies, do the suppliers receive?
(Related to Checkpoint 19.1 on page 625) (Converting currencies) An American business needs to pay (a) 15,000 Canadian dollars, (b) 1.5 million yen, and(c) 55,000 Swiss francs to businesses abroad. What are the dollar payments to the respective countries?
(Related to Checkpoint 19.2 on page 628) (Determining the percent-per-annum premium or discount) You are in need of Canadian dollars in six months, but before entering a forward contract to buy them, you would like to know their premium or discount from the existing spot rate. Calculate the premium
(Spot rates) Compute the Canadian dollar/yen and the yen/Swiss franc spot rate from the data in the preceding table.
(Foreign exchange arbitrage) You own $10,000. The dollar rate in Tokyo is 216.6743T. The yen rate in New York is given in the previous table. Are arbitrage profits possible? Set up an arbitrage scheme with your capital. What is the gain in dollars?
(Bid, spot, and forward rates) The spreads on the contracts as a percent of the asked rates are 2 percent for yen, 3 percent for Canadian dollars, and 5 percent for Swiss francs. Show, in a table similar to the preceding one, the bid rates for the different spot and forward rates.
(Indirect quotes) Compute the indirect quote for the spot and forward Canadian dollar, yen, and Swiss franc contracts.
(Converting currencies) An American business pays $10,000, $15,000, and $20,000 to suppliers in Japan, Switzerland, and Canada, respectively. How much, in local currencies, do the suppliers receive?
(Related to Checkpoint 19.1 on page 625) (Converting currencies) An American business needs to pay (a) 10,000 Canadian dollars, (b) 2 million yen, and(c) 50,000 Swiss francs to businesses abroad. What are the dollar payments to the respective countries?
A corporation desires to enter a particular foreign market. The DFI analysis indicates that a direct investment in the plant in the foreign country is not profitable. What other course of action can the company take to enter the foreign market? What are the important considerations?
How is the direct foreign investment decision made? What are the inputs to this decision process? Are the inputs more complicated than those to the domestic investment problem? If so, why?
What risks are associated with direct foreign investment? How do these risks differ from those encountered in domestic investment?
In the New York exchange market, the forward rate for the Indian currency, the rupee, is not quoted. If you were exposed to exchange risk in rupees, how could you cover your position?
What steps can a firm take to reduce foreign exchange rate risk? Indicate at least two different techniques.
Define exchange rate risk and political risk.
How do purchasing-power parity, interest rate parity, and the International Fisher Effect explain the relationships between the current spot rate, the future spot rate, and the forward rate?
What is meant by arbitrage profits?19—5. What are the markets and mechanics involved in engaging in simple arbitrage?
(Related to The Business of Life: International Investing on page 634) Why is the diversification that international investing provides to individual investors of value?
(Related to Regardless of Your Major: Working in a Flat World on page 622) Why do businesses operate internationally and what different types of businesses tend to operate in the international environment? Why are the techniques and strategies available to these firms different? Why is it important
What additional factors are encountered in international as compared with domestic financial management? Discuss each briefly.
What is exchange rate risk? Why would a multinational firm be concerned about it?
Define the types of risk that are commonly referred to as political risk, and give some examples of them.
What is the International Fisher Effect?
What is the law of one price? Give a simple example.
What does the term interest rate parity mean?
What is the forward spot differential and how is it calculated? Why would a company be interested in it?
What is a forward exchange rate? Why would a company be interested in it?
What is a spot transaction? What is a direct quote? An indirect quote?
Compare the incremental revenues with the incremental costs. Should the proposed change be enacted?
Estimate the change in the cost of the cash discount if the proposed change in credit policy is enacted.
Estimate the cost of additional investment in accounts re¬ceivable and inventory associated with this change in credit policy.
What is the estimated change in profits resulting from the increased sales less any additional bad debts associated with the proposed change in credit policy?
If Ice Nine changes its trade credit terms to 2/60, net 90, what is the annualized cost to a firm that buys on credit from Ice Nine and decides to forgo the trade credit discount and pay on the net day?
If a firm currently buys from Ice Nine on trade credit with the present terms of 1/50, net 70 and decides to forgo the trade credit discount and pay on the net day, what is the an¬nualized cost to that firm of forgoing the discount?
What determines the size of investment Ice Nine makes in accounts receivable?
(Related to Checkpoint 18.3 on page 602) (Evaluating trade credit discounts)Determine the annualized cost of forgoing the trade credit discount on the following terms (assume a 360 day year):a. 1/10, net 20b. 2/10, net 30c. 3/10, net 30d. 3/10, net 60e. 3/10, net 90f. 5/10, net 60
(Related to Checkpoint 18.3 on page 602) (Evaluating trade credit discounts) If a firm buys on trade credit terms of 2/10, net 50 and decides to forgo the trade credit discount and pay on the net day, what is the annualized cost of forgoing the discount (assume a 360 day year)?
(Related to Checkpoint 18.3 on page 602) (Calculating the cost of a short-term bank loan) Jimmy Hale is the owner and operator of the grain elevator in Brownfield, Texas, where he has lived for most of his 62 years. The rains during the spring have been the best in a decade and Mr. Hale is
(Related to Checkpoint 18.3 on page 602) (Calculating the cost ofshort-term financing) You plan to borrow $20,000 from the bank to pay for inventories for a gift shop you have just opened. The bank offers to lend you the money at 10 percent annual interest for the 6 months the funds will be needed
(Related to Checkpoint 18.3 on page 602) (Calculating the cost of a short-term bank loan) On July 1, 2009, the Southwest Forging Corporation arranged for a line of credit with the First National Bank of Dallas. The terms of the agreement call for a $100,000 maximum loan with interest set at 1
(Related to Checkpoint 18.3 on page 602) (Calculating the cost ofshort-term financing) The R. Morin Construction Company needs to borrow $100,000 to help finance the cost of a new $150,000 hydraulic crane used in the firm’s commercial construction business. The crane will pay for itself in one
(Related to Checkpoint 18.3 on page 602) (Calculating the cost of trade credit)Calculate the annualized cost of the following trade credit terms, when payment is made on the net due date (assume a 360 day year).a. 2/10, net 30b. 3/15, net 30c. 3/15, net 45d. 2/15, net 60
(Related to Checkpoint 18.3 on page 602) (Estimating the cost of bank credit)Paymaster Enterprises has arranged to finance its seasonal working-capital needs with a short-term bank loan. The loan will carry a rate of 12 percent per annum with interest paid in advance (discounted). In addition,
(Related to Checkpoint 18.2 on page 598) (Calculating the operating and cash conversion cycle) Carraway Seed Company Inc. has for many years cultivated and sold what are known as heritage plants and seeds. For example, the company has sought out older varieties of tomato plants that are no longer

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Financial Management Principals And Applications 11th Edition Sheridan Titman, John D Martin, Arthur J Keown - Solutions

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