Derivatives and Hedging Risk

What is the primary objective of a firm using derivatives for hedging?

According to the text, what is a key difference between a forward contract and a cash transaction?

What is the defining characteristic of a futures contract that distinguishes it from a forward contract regarding daily settlement?

A farmer who anticipates harvesting 50,000 bushels of wheat and sells futures contracts to lock in a price is engaging in what type of hedge?

A company has a contract to sell a finished product at a fixed price but needs to purchase oil as a key input in the future. To mitigate the risk of rising oil prices, what type of hedge should the company use?

If a five-year pure discount bond and a one-year pure discount bond are both currently worth $100, which bond will experience greater percentage price changes when interest rates fluctuate?

What is the primary goal of duration hedging for a financial institution like a bank?

In an interest rate swap, what is typically exchanged between two counterparties?

What is the purpose of a credit default swap (CDS)?

A firm is borrowing at a short-term rate and is concerned that interest rates might rise. To protect itself, it purchases a derivative that pays the difference between the market rate (LIBOR) and 7 percent, but only if LIBOR is greater than 7 percent. What is this derivative called?

What is the primary reason that the mark-to-the-market system for futures contracts was developed?

A mortgage banker makes a commitment on March 1 to lend $1 million on May 1. To hedge against the risk of rising interest rates, which would decrease the value of these mortgages when she sells them, what action should she take in the futures market on March 1?

A five-year, 10 percent coupon bond and a five-year, 1 percent coupon bond both have the same maturity. Which bond will have a higher duration and thus be more sensitive to interest rate changes?

A buyer enters a futures contract for wheat at a closing price of $4.07 on Thursday. On Friday, the price closes at $4.05. On Monday, the price closes at $4.12. What is the net cash flow for the buyer from marking-to-market on Friday and Monday combined?

A derivative contract has a payoff of 20 percent minus LIBOR. If LIBOR is 9 percent, what is the interest rate paid by the contract?