Financial Management Principles And Applications 14th Global Edition Sheridan Titman, Arthur Keown, John Martin - 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 forward contracts versus exchange-traded futures contracts in implementing a risk management strategy designed to address the problem of commodity price risk?
How 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?
(Analyzing interest rate swaps) The Prince Racket Company manufactures a line of tennis and raquetball 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 (1 percent). The loan has a five-year
(Analyzing interest rate swaps) Marx and Winter, Inc., operates a chain of retail clothing stores throughout the U.S. Midwest. 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 (1/2 percent). The loan has a
(Valuing call options) (Related to Checkpoint 20.3 on page 686) You’ve just been introduced to the Black-Scholes option pricing model 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 $25.00 per share, and the
(Valuing call options) (Related to Checkpoint 20.3 on page 686) 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 call 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 (i.e., has a premium of)$1. What does the profit or loss graph (similar to Figure 20.7) look like for this option?In drawing this graph, assume that
(Calculating 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.
(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 (i.e., has a premium is of) $2.What does the profit or loss graph (similar to that in Figure 20.5) look like for this option? In drawing this
(Calculating call option payouts) (Related to Checkpoint 20.2 on page 682) Draw a profit or loss graph (similar to that in Figure 20.5) 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
(Analyzing 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.
(Hedging with forward contracts) (Related to Checkpoint 20.1 on page 672) The Specialty Chemical Company operates a crude oil refinery located in New Iberia, Louisiana.The company refines crude oil and sells the by-products to companies that make plastic bottles and jugs. The firm is currently
(Calculating forward contract payouts) Repeat Study Problem 20–1, but this time draw the profit or loss graph from the perspective of the individual who sold (is short on) the forward contract.
(Calculating forward contract payouts) 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 on 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 these commodities in the future.
What is a forward contract, and how does it typically differ from an exchangetraded futures contract?
Finance for Life: Do You Need Life Insurance? on page 670 discussed factors involved in the decision to purchase life insurance. What are some commonsense guidelines that can be used to answer the question of whether you need life insurance?
What are some of the means by which firms transfer risk to other parties? Should firms always transfer risks when it is possible to do so?
What was the risk management policy followed by the Chesapeake Energy Corporation (CHK) with respect to the price of the oil and gas it needed for its future production prior to 2011?
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.
In Regardless of Your Major: Welcome to a Risky World on page 666, the need to engage in risk management was linked to the day-to-day activities of firm employees from multiple functional areas, including operations, marketing, and accounting.What are the two sources of risk identified in this
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.
What are some common risks that are transferred through the use of insurance?
What is insurance, and how is it used to manage risk?
Describe the primary types of risk that a firm might face.
What are the five steps in the risk management process?
Understand how to value options and how swaps work.
Understand the advantages and disadvantages of using exchange-traded futures and option contracts to hedge price risk.
Use forward contracts to hedge commodity price risk.
Understand how insurance contracts can be used to manage risk.
Define risk management in the context of the five-step risk management process.
What are swap contracts? How are they used in the management of interest rate risk?
What are the advantages and disadvantages of using forward contracts versus exchange traded future contracts in implementing a risk management strategy aimed at minimizing commodity price risk?
How can forward contracts be used to manage risk?
How can insurance be useful in managing the risks that a firm faces?
What is corporate risk management?
(Working with international capital budgeting) (Related to Checkpoint 19.3 on page 653) An American firm is considering a new project in the country of Geeblaistan.This new project will produce the following cash flows, measured in BLAs (the currency of Geeblaistan), that are expected to be
(Working with international capital budgeting) (Related to Checkpoint 19.3 on page 653) Assume you are working for a firm based in the United States that is considering a new project in the country of Tambivia. This new project will produce the following cash flows, measured in TABs (the currency
(Applying purchasing-power parity) Gunther Plastic Toys makes plastic toys for children. It has two factories in Indonesia while the business is run from its headquarters in Berlin. They buy plastic granules from a supplier in India. The supplier quotes a price of 43,300 per metric ton. However,
(Applying purchasing-power parity) Uniqlo is a very popular clothing brand based in Japan. One of its most popular products, an ultra light down jacket, is priced at€69.90 at its Paris outlet. The same jacket is sold at SGD 99.90 at its Singapore outlet. If purchasing power parity exists, what
(Applying interest rate parity) The one-year current yield on treasury bonds in India is 5 percent. The same yield on the UK treasury bonds is 0.25 percent for one year.The exchange rate between Indian rupee and the British pound as of now is 81.77 per £1. If the interest rate parity holds, what
(Applying interest rate parity) Peter has gathered the following information and quotes for the British and Swiss forex markets.Spot exchange rate CHF1.2151/£Six-month forward exchange rate CHF1.1922/£GBP interest rate (6 months) 2.5% per year CHF interest rate (6 months) 2.0% per yeara. Is the
(Determining the percent-per-annum premium or discount) (Related to Checkpoint 19.2 on page 646) You are in need of Swiss francs in six months, but before entering into a forward contract to buy them, you would like to know their premium or discount if the spot rate is 0.9772 and the forward
(Computing spot rates) Compute the Canadian dollar/yen and the yen/Swiss franc spot rates from the data in the preceding table.
(Analyzing 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?
(Computing bid, ask, and forward rates) The spreads on the contracts as a percentage of the asked rate 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.
(Computing indirect quotes) Compute the indirect quote for the spot and forward Canadian dollar, yen, and Swiss franc contracts using the data found above.
(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?
(Converting currencies) (Related to Checkpoint 19.1 on page 643) 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?
(Determining the percent-per-annum premium or discount) (Related to Checkpoint 19.1 on page 643 and Checkpoint 19.2 on page 646) The spot and forward rates for the British pound against the U.S. dollar has been quoted as follows:Spot 1.2234 One-Month 1.2125 Three-Month 1.1668 Six-Month 1.1124
(Computing spot rates) Compute the Canadian dollar/yen and the yen/Swiss franc spot rates from the data in the preceding table.
(Analyzing foreign exchange arbitrage) You own $10,000. The dollar rate in Tokyo is 216.6743¥. 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?
(Computing bid, spot, and forward rates) The spreads on the contracts as a percentage of the asked rate 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.
(Computing indirect quotes) Compute the indirect quote for the spot and forward Canadian dollar, yen, and Swiss franc contracts.
(Converting currencies) (Related to Checkpoint 19.1 on page 643) 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?
(Converting currencies) (Related to Checkpoint 19.1 on page 643) 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 direct foreign investment 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
What is “translation risk” for firms that have a foreign subsidiary?
What risks are associated with direct foreign investment? How do these risks differ from those encountered in domestic investment?
The forward rate for the Indian currency, the rupee, is not quoted in the New York exchange market. If you were exposed to exchange risk in rupees, how could you cover your position?
It is argued that the management of political risk in an international finance context is more of an art than a science. Comment on the validity of this argument.
In June 2016, the people of the United Kingdom voted in favor of a proposal to exit from the European Union (EU) in an event called Brexit. Explain how Brexit may have affected the political risk of a German company that has recently established a manufacturing unit in the United Kingdom.
How do purchasing-power parity, interest rate parity, and the International Fisher Effect explain the relationships among the current spot rate, the future spot rate, and the forward rate?
Explain how triangular arbitrage ensures that currencies are traded at essentially the same price across different markets in the world.
What is meant by arbitrage profits?
Referring back to Finance for Life: International Investing on page 652, why do you think individual investors would like to diversify their investment portfolio into international markets?
Referring back to Regardless of Your Major: Working in a Flat World on page 640, 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
What additional factors are encountered in international as compared with domestic financial management? Discuss each briefly.
What is exchange rate risk? Why would an MNC 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 a 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?
Define spot transaction, direct quote, and indirect quote.
Discuss the risks that are unique to the capital budgeting analysis of direct foreign investments.
Describe interest rate and purchasingpower parity.
Understand the nature and importance of the foreign exchange market and learn to read currency exchange rate quotes.
Compare the incremental revenue with the incremental costs. Should the proposed change be enacted?
Estimate the change in the cost of cash discount if the proposed change in the credit policy is enacted.
Estimate the cost of additional investment in accounts receivable 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 the credit policy?
If Smith Trading changes its trade credit terms to 2/60, net 90, what is the annualized cost to a firm that buys on credit from Smith Trading and decides to forego the trade credit discount and pay on the net day?
If a firm currently buys from Smith Trading under the present trade credit terms of 1/50, net 70 and decides to forego the trade credit discount and pay on the net day, what is the annualized cost to that firm of foregoing the discount?

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Financial Management Principles And Applications 14th Global Edition Sheridan Titman, Arthur Keown, John Martin - Solutions

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