Indicate the type of hedge each activity described below would represent.Activity1. An options contract to hedge possible future price changes of inventory.2. A futures contract to hedge exposure to interest rate changes prior to replacing bank notes when they mature.3. An interest rate swap to synthetically convert floating rate debt into fixed rate debt.4. An interest rate swap to synthetically convert fixed rate debt into floating rate debt.5. A futures contract to hedge possible future price changes of timber covered by a firm commitment to sell.6. A futures contract to hedge possible future price changes of a forecasted sale of aluminum.7. ExxonMobil's net investment in offshore drilling operations in Brazil.8. An interest rate swap to synthetically convert floating rate interest on an available-for-sale debt investment intofixed rate interest.9. An interest rate swap to synthetically convert fixed rate interest on a held-to-maturity debt investment intofloating rate interest.10. An interest rate swap to synthetically convert fixed rate interest on an available-for-sale debt investment intofloating rate interest.Hedge Type

The objective of the question is to identify the type of hedge each activity represents. Hedging is…

Answered: Indicate the type of hedge each…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Financial Futures Markets: Explain how sellers of financial futures contracts can offset their position. How is their gain or loss determined? Note: there are 2 parts to this question.
a)define interest rate swaptions, and differentiate between payer swaptions and receiver swaptions. b)define forward swaps. c)define risk management. d)discuss reasons for practicing risk management. e)discuss how firms can benefit from risk management.
In the context of financial derivatives, what is a futures contract? A) An agreement to exchange assets at a predetermined price and date. B) A contract that grants the holder the right, but not the obligation, to buy or sell an asset. C) A contract to buy or sell a specific quantity of an asset at a future date at a price specified today. D) A contract that provides regular interest payments and returns the principal at maturity.
A swap: Group of answer choices B. Gives the holder the right to see the underlying bond. A. Allows the buyer to purchase the underlying instrument. C. Is an OTC agreement to exchange the cash flows of two different securities. D. Not effective at managing interest rate risks.
A(n). OOO futures hedge is most likely to result in ongoing payments over the life of the foreign exchange instrument. options money market forward
The time value of money is used in calculating bond prices because: Group of answer choices A - The company might choose to repay the bonds prior to their maturity date B - Bond investors receive future payments and purchase bonds with current dollars C - The amount to be repaid at maturity will change as market rates change D - Cash interest payments to bondholders will change as market rates change
All of the statements below are true of futures contractsexcept that futures contracts: O a. result in predictable gross profits. O b. result in predictable cash flows. O c. eliminate downside risk and upside potential. O d. eliminate downside risk while allowing for upside potential.
Interest Rate Swap: A company that expects interest rates to rise and wishes to exchange its floating interest rate for a fixed rate would: Select one OA. Enter into a payer swap B. Enter into a receiver swap C. Sell interest rate futures OD. Buy interest rate futures
Martin Bowman is preparing a report distinguishing traditional debt securities from structured note securities. Discuss how the following structured note securities differ from a traditional debt security with respect to coupon and principal payments:a. Equity index-linked notes.b. Commodity-linked bear bond.
Describe how the price of a futures contract is established in theory, with reference to arbitrage.
A credit default swap (CDS) is a privately negotiated contract which you can use to: Question 2 options: hedge prepayment risk on a pool of mortgages. hedge default risk on fixed income assets. hedge interest rate risk on fixed income assets. hedge exchange rate risk on euroyen deposits.
What is the correct strategy when the asset backing the futures contract differs from the asset whose price is being hedged? O Short hedge O Long hedge O Perfect hedge O Tailing the hedge O Cross hedge

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