Corporate Fin Mgt NDLM.PDF

(3) What is the value of the following call option according to the OPM?

Stock Price = $ 27.00

Exercise Price = 25.00

Time to expiration = 6 months

Risk-free rate= 6.0%

Stock return variance= 0.11

g. What impact does each of the following call option parameters have on the value

of a call option?

(1) Current stock price

(2) Exercise price

(3) Option’s term to maturity

(4) Risk-free rate

(5) Variability of the stock price.

h. What is corporate risk management? Why is it important to all firms?

i. Risks that firms face can be categorized in many ways. Define the following

types of risk:

(1) Speculative risks

(2) Pure risks

(3) Demand risks

(4) Input risks

(5) Financial risks

(6) Property risks

(7) Personnel risks

(8) Environmental risks

(9) Liability risks

(10) Insurable risks

j. What are the three steps of corporate risk management?

k. What are some actions that companies can take to minimize or reduce risk

exposures?

l. What is financial risk exposure? Describe the following concepts and techniques

that can be used to reduce financial risks:

(1) Derivatives
(2) Futures markets
(3) Hedging
(4) Swaps

m. Describe how commodity futures markets can be used to reduce input price risk.