What is one of the primary reasons a firm might choose to hedge, even if investors can hedge on their own?
Explanation
While shareholders of a public company can diversify or hedge on their own, the firm itself has unique reasons to manage risk. By stabilizing cash flows, a company can support a higher level of debt (gaining more tax shield benefits), avoid costly financial distress, and ensure it can always fund its optimal capital budget, all of which can increase shareholder value.
Other questions
What is the primary motivation for firms to engage in risk management, according to the text?
What is a key difference between a forward contract and a futures contract?
What is the definition of a call option?
In the context of the Black-Scholes Option Pricing Model, what is the effect of an increase in the stock's price volatility (variance) on the value of a call option, holding other factors constant?
What is the term for a debt obligation that is derived from some other debt obligation, such as zero coupon bonds created from Treasury bonds?
According to the Binomial Option Pricing Model example for Western Cellular, what is the price of the call option if the stock sells for $40, the strike price is $35, the risk-free rate is 8 percent, and the stock can end up at either $30 or $50 in one year?
If a stock is trading at $30 per share, what is the exercise value of a call option on the stock with a strike price of $25?
What type of risk management strategy involves two parties with mirror-image risks entering a transaction to eliminate those risks?
What is the primary function of a swap agreement in finance?
In the context of risk management, what are pure risks?
What is the implied nominal annual interest rate on a 10-year U.S. T-notes futures contract that settled at a price of 103-060, or 103.1875 percent of par value?
What is the primary purpose of a 'riskless hedge' in the context of option pricing models?
What does a long hedge strategy using futures contracts aim to protect against?
What term describes the situation where the gain or loss on a hedged transaction exactly offsets the loss or gain on the unhedged position?
An inverse floater is a type of structured note. What is its key characteristic?
Based on the Black-Scholes Option Pricing Model, what is the value of a call option given the following data: Stock price is $33, strike price is $33, time to expiration is 6 months (0.50), risk-free rate is 10 percent, variance is 0.09, N(d1) is 0.63369, and N(d2) is 0.55155?
What is the premium on a call option if the stock sells for $31, the exercise price is $25, and the option's market price is $7?
Which of the following is NOT an assumption of the Black-Scholes Option Pricing Model?
If a U.S. firm needs to guard against a rise in interest rates for a future bond issuance, what would be an appropriate hedging strategy using futures?
In an interest rate swap, if Company S has a floating-rate bond and stable cash flows, while Company F has a fixed-rate bond and cyclical cash flows, what is the likely motivation for a swap?
When an investor sells a call option on a stock they already own, what is this action called?
Which risk management classification includes the risk that a firm's plant will be destroyed by a fire?
What does a call option's premium represent?
What is the term for a long-term option, with a maturity of up to 3 years, that is listed on exchanges and tied to individual stocks or stock indexes?
How does the risk-free interest rate affect the value of a call option, according to the Black-Scholes model?
What is the primary role of speculators in a derivatives market like the futures market for wheat?
What is the exercise value and premium for a call option with a strike price of $20, when the stock price is $22 and the option's market price is $10.50?
What is the term for risks that can be covered by insurance, such as property and liability risks?
When a firm plans to issue bonds but fears that interest rates will rise before the issuance, it would use which type of hedge?
What is self-insurance in the context of corporate risk management?
A call option on Boudreaux Company's stock has an exercise price of $14, an exercise value of $20, and a premium of $5. What are the option's market value and the stock's current price?
Why have derivative markets grown so rapidly in recent years?
A U.S. firm must pay 200 million Swiss francs in 90 days. If the 90-day forward exchange rate is 0.9509 francs per dollar, how many dollars will be required to honor the obligation?
What is the primary reason that a call option's premium over its exercise value declines as the stock price increases to high levels?
A firm is considering a call option on a stock. Which of the following events would be likely to decrease the market value of the call option?
What type of derivative contract is tailor-made, negotiated between two parties, and not traded on an exchange after being signed?
What is the primary risk associated with a 'naked option' position?
According to the text, why might a company like Porter Electronics, which uses copper as a raw material, buy copper futures contracts?
What does it mean for an option to be 'in-the-money'?
The Black-Scholes model calculates the value of an option as the difference between which two components?
According to the survey of CFOs mentioned in the text, what is the most highly-ranked benefit of risk management?
What is a key risk for the holder of an inverse floater note?
A put option on Yonan Communications stock has an exercise price of $60 and a market value of $2.90. What is the premium on the put option if the stock currently sells for $65?
Which of the following describes the process of 'marking to market' for a futures contract?
Which of the following is a key reason why risk management through hedging can add value to a firm, according to the text?
In the Binomial Model example, a riskless portfolio is created by buying 0.75 shares of stock and selling one call option. If the stock ends up at $50, what is the value of the option position to the seller?
According to the text, a major function of risk management involves evaluating all alternatives for managing a particular risk and then choosing the optimal one. Which of the following is considered an alternative to buying insurance?
What is the primary difference between a short hedge and a long hedge?
If a current stock price is $16, what is the value of a call option based on the Black-Scholes model, given an exercise price of $16, expiration of 6 months, risk-free rate of 8 percent, variance of 0.12, N(d1) = 0.61247, and N(d2) = 0.51628?