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Corporate Finance: Asia-Pacific Edition

John Graham, Chris Adam, Brindha Gunasingham

Chapter 19

Introduction to Financial Risk Management - all with Video Answers

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Chapter Questions

01:57

Problem 1

Historically, what types of risk were the focus of most companies' risk-management practices?

Brooke Bussoletti
Brooke Bussoletti
Numerade Educator
01:13

Problem 2

Distinguish between the motivations for purchasing insurance and the motivations for hedging market-wide sources of risk.

Jingchi Yan
Jingchi Yan
Numerade Educator

Problem 3

Distinguish between transactions exposure and economic exposure

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Problem 4

In what way can hedging reduce the risk of financial distress? How might reducing the risk of financial distress increașe company value?

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01:38

Problem 5

Explain how hedging can reduce a company's tax liability.

Ayush Kumar
Ayush Kumar
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Problem 6

Why do closely held companies tend to hedge more than companies with diffuse ownership?

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Problem 7

How can hedging make it easier to evaluate a manager's performance?

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Problem 8

What are the advantages of using exchange-traded derivatives to hedge a risk exposure? What are the advantages of over-the-counter derivatives?

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Problem 9

Conceptually, how do we determine the fair forward price for an asset? What are the necessary assumptions to arrive at a fair forward price?

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01:23

Problem 10

Conceptually, what are the differences between Equations 19.1, 19.2 and 19.3? Which equation would you use to determine the fair forward price for an asset that does not earn any income but is costly to store, such as gold or silver? How would you modify the equation?

Ameer Said
Ameer Said
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Problem 11

Describe the features of a futures contract that make it more liquid than a forward contract.

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Problem 12

Explain the features of a futures contract that make it have less credit risk than a forward contract.

Rashmi Sinha
Rashmi Sinha
Numerade Educator

Problem 13

Why is fungibility an important feature of futures contracts?

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Problem 14

Describe the delivery process for futures contracts. Why does delivery rarely take place in futures contracts?

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Problem 15

Why is a call option on an interest rate called an interest rate cap and a put option called an interest rate floor?

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Problem 16

Explain how a fixed-for-floating swap can be considered a portfolio of forward contracts on six-month discount bonds.

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Problem 17

Go to the CME Group website (http://www.cmegroup.com), and determine the contract specifications for soybean meal futures and 10-year US Treasury note futures. Apart from the difference in the type of asset, what is the difference between the two contracts in terms of what qualifies as deliverable grades?

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