Loose Leaf for Foundations of Financial Management Format: Loose-leaf
17th Edition
ISBN: 9781260464924
Author: BLOCK
Publisher: Mcgraw Hill Publishers
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Question
Chapter 8, Problem 12DQ
Summary Introduction
To Explain: The term, “hedging�, which is used in the financial futures market to minimize risks.
Introduction:
Hedging:
It is the practice of preventing an investment from being exposed to risk against undesired price fluctuations. It is the strategical use of financial instruments for the purposes of offsetting risks.
Expert Solution & Answer
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Students have asked these similar questions
which one is correct please confirm?
Q17: "When interest rates fall, a bank that perfectly hedges its portfolio of Treasury securities in the futures market"
suffers a loss
experiences a gain.
has no change in its income
none of the above.
Which of the following is NOT an external method of interest rate risk management? *
A. Using an interest rate swap
B. Using financial futures
C. Using an off-balance-sheet strategy, such as a forward rate agreement
D. Having fixed-interest assets financed by fixed-interest liabilities and equity
1. What are some examples of financial instruments that can be used for hedging interest rate risks, and how would they work?
Chapter 8 Solutions
Loose Leaf for Foundations of Financial Management Format: Loose-leaf
Ch. 8 - Under what circumstances would it be advisable to...Ch. 8 - Discuss the relative use of credit between large...Ch. 8 - Prob. 3DQCh. 8 - Prob. 4DQCh. 8 - Prob. 5DQCh. 8 - Prob. 6DQCh. 8 - Prob. 7DQCh. 8 - Prob. 8DQCh. 8 - Prob. 9DQCh. 8 - Prob. 10DQ
Ch. 8 - Prob. 11DQCh. 8 - Prob. 12DQCh. 8 - Compute the cost of not taking the following cash...Ch. 8 - Regis Clothiers can borrow from its bank at 17...Ch. 8 - Simmons Corp. can borrow from its bank at 17...Ch. 8 - Your bank will lend you $4,000 for 45 days at a...Ch. 8 - Prob. 5PCh. 8 - Prob. 6PCh. 8 - Mary Ott is going to borrow $10,400 for 120 days...Ch. 8 - Prob. 8PCh. 8 - Prob. 9PCh. 8 - Prob. 10PCh. 8 - McGriff Dog Food Company normally takes 27 days to...Ch. 8 - Maxim Air Filters Inc. plans to borrow $300,000...Ch. 8 - Digital Access Inc. needs $400,000 in funds for a...Ch. 8 - Carey Company is borrowing $200,000 for one year...Ch. 8 - Randall Corporation plans to borrow $233,000 for...Ch. 8 - Prob. 16PCh. 8 - Your company plans to borrow $13 million for 12...Ch. 8 - If you borrow $5,300 at $400 interest for one...Ch. 8 - Zerox Copying Company plans to borrow $172,000 ....Ch. 8 - Prob. 20PCh. 8 - Mr. Hugh Warner is a very cautious businessman....Ch. 8 - The Reynolds Corporation buys from its suppliers...Ch. 8 - Prob. 23PCh. 8 - Neveready Flashlights Inc. needs $340,000 to take...Ch. 8 - Harper Engine Company needs $631,000 to take a...Ch. 8 - Summit Record Company is negotiating with two...Ch. 8 - Charming Paper Company sells to the 12 accounts...Ch. 8 - The treasurer for Pittsburgh Iron Works wishes to...Ch. 8 - Prob. 2WECh. 8 - Prob. 3WE
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- How can a company offset risk using interest rate swaps?arrow_forwardFrom the perspective of the treasury professional, which of the following is a type of market risk but is NOT a type of financial risk? Commodity price risk Equity price risk Interest rate risk Foreign exchange (FX) riskarrow_forward7. Determinants of market interest rates Some characteristics of the determinants of nominal interest rates are listed as follows. Identify the components (determinants) and the symbols associated with each characteristic: Characteristic Component Symbol This is the rate for a riskless security that is exposed to changes in inflation. This is the premium that reflects the risk associated with changes in interest rates for a long-term security. This premium is added when a security lacks marketability, because it cannot be bought and sold quickly without losing value. This is the rate on short-term US Treasury securities, assuming there is no inflation. Over the past several years, Germany, Japan, and Switzerland have had lower interest rates than the United States due to lower values of this premium. It is based on the bond’s rating; the higher the rating, the lower the premium added, thus lowering the…arrow_forward
- 10. An announcement that the prices of goods and services in the market are risking would cause an increase in which of the following? O a. The default risk premium O o The risk free rate ) r The liquidity risk premium O o The inflation risk premiumarrow_forwarda) We can eliminate market exposure from our portfolio by shorting S&P500 index. Why bother with futures market? What are the disadvantages of using futures market for hedging?arrow_forwardWhy are derivatives considered riskier than other financial instruments?arrow_forward
- Explain why the covered interest rate parity (CIP) condition can be violated during the financial crisis based on Naohiko Baba and Frank Packer (2009)..arrow_forwardb) wri fi 2 bj We can eliminate market exposure from our portfolio by shorting S&P500 index. Why bother with futures market? What are the disadvantages of using futures market for hedging?arrow_forwardExplain what a first-to-default credit default swap is. Does its value increase or decrease as the default correlation between the companies in the basket increases? Explain.arrow_forward
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