Helpful questions about cash flows and budgeting
In theory, increasing the volatility of its cash flows will never increase a company's value.
Suppose the December CBOT Treasury bond futures contract has a quoted price of 90-18 . If annual interest rates go up by 1.00 percentage point, what is the gain or loss on the futures contract? (Assume a $1,000 par value, and round to the nearest whole dollar.)
Suppose the September CBOT Treasury bond futures contract has a quoted price of 102-12. What is the implied annual interest rate inherent in this futures contract?
Suppose the December CBOT Treasury bond futures contract has a quoted price of 90-16. What is the implied annual interest rate inherent in the futures contract
Which of the following are NOT ways risk management can be used to increase the value of a firm?
1. Risk management can increase debt capacity.
2. Risk management can help firms minimize taxes.
3. Risk management can help a firm maintain its optimal capital budget.
4. Risk management can allow managers to defer receipt of their bonuses and thus postpone tax payments.
5. Risk management can reduce the expected costs of financial distress.
The two basic types of hedges involving the futures market are long hedges and short hedges, where the words "long" and "short" refer to buying or selling futures. For example, a long hedge might buy Treasury bond futures and a short hedge might sell them.
Speculative risks are symmetrical in the sense that they offer the chance of a gain as well as a loss, while pure risks are those that can only lead to losses.
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