Principles of Corporate Finance_ 12th Edition

698 Part Eight Risk Management

bre44380_ch26_673-706.indd 698 09/30/15 12:09 PM

Three general articles on corporate risk management are:

K. A. Froot, D. Scharfstein, and J. C. Stein, “A Framework for Risk Management,” Harvard Business

Review 72 (November–December 1994), pp. 59–71.

B. W. Nocco and R. M. Stulz, “Enterprise Risk Management: Theory and Practice,” Journal of Applied

Corporate Finance 18 (Fall 2006), pp. 8–20.

C. H. Smithson and B. Simkins, “Does Risk Management Add Value? A Survey of the Evidence,”

Journal of Applied Corporate Finance 17 (Summer 2005), pp. 8–17.

The Summer 2005 and Fall 2006 issues of the Journal of Applied Corporate Finance are devoted to

risk management, and current news and developments are discussed in Risk magazine. You may

also wish to refer to the following texts:

J. C. Hull, Options, Futures, and other Derivatives, 9th ed. (Englewood Cliffs, NJ: Prentice Hall, 2014).

C. H. Smithson, Managing Financial Risk, 3rd ed. (New York: McGraw-Hill, 1998).

R. M. Stulz, Risk Management and Derivatives (Cincinnati, OH: Thomson-Southwestern Publishing, 2003).

Schaefer’s paper is a useful review of how duration measures are used to immunize fixed liabilities:

S. M. Schaefer, “Immunisation and Duration: A Review of Theory, Performance and Applications,”

Midland Corporate Finance Journal 3 (Autumn 1984), pp. 41–58.

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FURTHER

READING

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PROBLEM

SETS

Select problems are available in McGraw-Hill’s Connect.

Please see the preface for more information.

BASIC

1. Vocabulary check Define the following terms:
   a. Spot price
   b. Forward vs. futures contract
   c. Long vs. short position
   d. Basis risk
   e. Mark to market
   f. Net convenience yield


2. Futures contracts True or false?
   a. Hedging transactions in an active futures market have zero or slightly negative NPVs.
   b. When you buy a futures contract, you pay now for delivery at a future date.
   c. The holder of a financial futures contract misses out on any dividend or interest payments
   made on the underlying security.
   d. The holder of a commodities futures contract does not have to pay for storage costs, but
   foregoes convenience yield.


3. Mark to market Yesterday you sold six-month futures on the German DAX stock market
   index at a price of 9,120. Today the DAX closed at 9,100 and DAX futures closed at 9,140.
   You get a call from your broker, who reminds you that your futures position is marked to
   market each day. Is she asking you to pay money, or is she about to offer to pay you?


4. Futures prices Calculate the value of a six-month futures contract on a Treasury bond. You
   have the following information:
   ∙ Six-month interest rate: 10% per year, or 4.9% for six months.
   ∙ Spot price of bond: 95.
   ∙ The bond pays an 8% coupon, 4% every six months.


5. Hedging “Northern Refineries does not avoid risk by selling oil futures. If prices stay above $2.40
   a gallon, then it will actually have lost by selling oil futures at that price.” Is this a fair comment?