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business
natural resource economics

Questions and Answers of Natural Resource Economics

30. North-Northwest Bank (NNWB) has a differential advantage in issuing variable-rate mortgages but does not want the interest income risk associated with such loans. The bank currently has a
29. Dickey Bank anticipates an increase in interest rates in 2016 and has therefore decided to engage in an interest-rate swap in which it pays 3% over a notional principal of million annually.
28. A trust manager for a stock portfolio wants to minimize short-term downside risk using Dow put options. The options expire in 60 days, have a strike price of 9,700, and have a premium of . The
27. A banker commits to a two-year commercial loan and expects to fulfill the agreement in 30 days. The interest rate will be determined at that time. Currently, rates are 7.5% for such loans. To
26. Liverpool Bank has an income gap of million, Alur Finance Co has an income gap of million and TLBR Bank has an income gap of million. Propose an interest rate swap that will benefit all three
25. Suppose a bank has an income gap of million. How can this bank use interest-rate swaps to hedge against interest rate increases? Determine the amount of the notional principal and propose an
24. A bank customer will be going to London in June to purchase £100,000 in new inventory. The current spot and futures exchange rates are as follows:Exchange Rates (Dollars/Pound) Period Rate Spot
23. A bank issues a fixed-rate 30-year mortgage with a nominal annual rate of 4.5%. If the required rate drops to 4.0% immediately after the mortgage is issued, what is the impact on the value of the
22. From the previous question, rates do indeed fall as expected, and the T-bond contract is priced at 103 5/32. If Springer closes its futures position, what is the gain or loss? How well does this
21. Springer County Bank has assets totaling million with a duration of five years, and liabilities totaling million with a duration of two years. Bank management expects interest rates to fall from
20. Assume the bank in the previous question partially hedges the mortgage by selling three 10-year T-note futures contracts at a price of 100 20/32. Each contract is for . After two months, the
19. A bank issues a million commercial mortgage with a nominal APR of 8%. The loan is fully amortized over 10 years, requiring monthly payments. The bank plans on selling the loan after two months.
18. Chicago Bank and Trust has million in assets and million in liabilities. The duration of the assets is 5.9 years, and the duration of the liabilities is 1.8 years. How many futures contracts does
17. Suppose you buy a futures contract at a price of 107 and that the margin requirement is 2 points. Determine the settlement price at which you will receive a margin call if the maintenance margin
16. Laura, a bond portfolio manager, administers a million portfolio. The portfolio currently has a duration of 8.5 years. Laura wants to shorten the duration to 6 years using T-bill futures. T-bill
15. A bank issues a variable-rate 30-year mortgage with anominal annual rate of 4.5%. If the interest rate drops to 4.0%after the first six months, what is the impact on the interest income for the
14. A hedger takes a short position in five T-bill futures contracts atthe price of 98 5/32. Each contract is for principal.When the position is closed, the price is 95 12/32. What is thegain or loss
13. Suppose that your company will be receiving 30 million euros sixmonths from now and the euro is currently selling for 1 euro perdollar. If you want to hedge the foreign exchange risk in
12. If your company has to make a 10 million euros payment to aGerman company in June, three months from now, how wouldyou hedge the foreign exchange risk in this payment with a125,000 euros futures
11. If your company has a payment of 200 million euros due one yearfrom now, how would you hedge the foreign exchange risk in thispayment with 125,000 euros futures contracts?
10. If the savings and loan you manage has a gap of million,describe an interest-rate swap that would eliminate the S&L’sincome risk from changes in interest rates.
9. Refer to the previous exercise. Determine Jason’s profits (for bothprices on expiration date) if instead of buying a put option on afutures contract he sold a Treasury bonds futurescontract at
8. Jason bought a put option on a Treasury bond futurescontract with an exercise price of 105 for a premium of . Ifon expiration the futures contract sells for 110, determine Jason’sprofits and
7. Suppose you buy a call option on a Treasury bond futures contract with an exercise price of 105. If the price of the Treasury bond is 115 at expiration, is the option at the money, in the money or
6. How would you use the options market to accomplish the same thing as in problem 5? What are the advantages and disadvantages of using an options contract rather than a futures contract?
5. Suppose that the pension you are managing is expecting an inflow of funds of million next year and you want to make sure that you will earn the current interest rate of 8% when you invest the
4. Refer to the previous exercise. Determine your profit if at the expiration date the settle price of the contract is 135 points. Calculate the gain or loss in each position.
3. Calculate the amount of futures contracts you need to sell to hedge the interest-rate risk on your holdings of million of Tbonds. Assume each contract currently sells for .
2. If the portfolio you manage is holding million of 6s of 2037 Treasury bonds with a price of 110, what forward contract would you enter into to hedge the interest-rate risk on these bonds over the
1. Leticia has to hedge the interest-rate risk of her holdings of in Treasury bonds by buying or selling futures contracts. Determine the type of transaction and the price of each contract if Leticia
2. If the finance company you manage has a gap of million (rate-sensitive assets greater than rate-sensitive liabilities by million), describe an interest-rate swap that would eliminate the
1. In the September 2016 FOMC meeting, governors and voting presidents of the Federal Reserve System agreed not to increase the federal funds rate target, but somewhat let the markets know that there
2. The Securities and Exchange Commission is responsible for regulating securities firms. Go to www.sec.gov. This is the official home page of the SEC. Use this page to answer the following. a. What
1. In initial public offerings (IPOs), securities are sold to the public for the first time. Go to http://www.renaissancecapital.com/ ipohome/marketwatch.aspx. This site lists various statistics
8. The limit-order book for a security is as follows:Unfilled Limit Orders Buy Orders Sell Orders 25.12 100 25.36 300 25.20 500 25.38 200 25.23 200 25.41 200 The specialist receives the following, in
7. Bluestar Airlines has physical assets valued at , and according to industry experts, the net present value of its future earnings amounts to per share. Assuming there are 1,000,000 outstanding
6. Xavi decides to short sell 10,000 shares of Guiness Co. stock, currently trading at per share. Determine Xavi’s profits if Guiness stock trades at per share at the moment in which Xavi has to
5. Suppose the issue of 5,000,000 shares of stock was originally oversubscribed at a price of per share. Calculate the money“left on the table” if you realize that the stock could have been
4. Refer back to the IPO of eBay presented in the problems for Chapter 13 . What were the fees for eBay as a percentage of funds raised? Does a pattern emerge?
3. What was the market value of Amazon.com following its first day as a publicly held company?
2. Mr. Doerr of Kleiner Perkins Caufield & Byers owned a significant number of shares. What was the market value of these shares at the end of the first day of trading?
1. What were the total proceeds from this offering? What part was retained by Amazon? What part by the investment bankers? What percentage of the offering is this?
14. What are the principal advantages often cited as motivation for a private equity buyout?Amazon.com issued an initial public offering in May 1997. Prior to its IPO, the following information on
13. Why do commercial banks object to brokerage houses being allowed to offer many of the services traditionally reserved for banks?
12. Is it possible to make money if you know that the price of a security will fall in the future? How?
11. Suppose that Axel was involved in a short sale of stock of a trucking company. What would happen to Axel’s profits if the price of the stock increases?
10. What valuable service do dealers provide that facilitates transaction trading and keeping the markets liquid?
9. What is the difference between a hostile takeover and a merger?
8. Consider an equity sale. Suppose Gordon Gekko is interested in buying the company only to dismantle all production and sell the company's assets, including its plant, to real estate investors.
7. Suppose you manage a pension fund and an investment bank contacts you to review the prospectus of a security issue that you know is currently undersubscribed. Assuming your research indicates that
6. Suppose you heard that an investment bank decided not to form a syndicate to underwrite an issue of securities. What does this piece of information tell you about the quality of the securities
5. Does the fact that a security has passed an SEC review mean that investors can buy the security without having to worry about taking a loss on the investment?
4. What are the primary services that an investment banker will provide a firm issuing securities?
3. What does it mean to say that investment bankers underwrite a security offering? How is this different from a best-efforts offering?
2. Ipora Bank conducts its business mostly by taking in deposits and then lending them out. Pando Bank earns its trade by helping corporations raise funds. If you want to open a checking account,
1. What was the motivation behind legislation separating commercial banking and investment banking?
2. The Internet offers many calculators to help consumers estimate their needs for various financial services. When using these tools, you must remember that they are usually sponsored by financial
1. There are many sites on the Web to help you compute whether you are properly preparing for your retirement. One of the better is offered by Quicken. You will find it at http://
9. Paul’s car slid off the icy road, causing in damage to his car. He was also treated for minor injuries, costing . His car insurance has a deductible, after which the full loss is paid. His
8. An employee contributes a year (at the end of the year) to her pension plan. What would be the total contributions and value of the account after five years? Assume that the plan earns 15% per
7. When opening an IRA account, investors have two options. With a regular IRA account, funds added are not taxed initially, but aretaxed when withdrawn. With a Roth IRA, the funds are taxed
6. A client needs assistance with retirement planning. Here are the facts: The client, Dave, is 21 years old. He wants to retire at 65. Dave has disposable income of per month. The IRA Dave has
5. Kio Outfitters estimated the following losses and probabilities from past experience:Loss ( ) Probability (%) 30,000 0.25 15,000 0.75 10,000 1.50 5,000 2.50 1,000 5.00 250 15.00 0 75.00What is the
4. Assume that the monthly payments faced by an insurance company are normally distributed with a mean of and a standard deviation of . Determine the probability than in a given month the company
3. Refer to the previous exercise. Suppose an individual prefers to play the game rather than to accept with certainty. Is this individual risk averse or a risk lover?
2. Calculate the expected payoff of a game in which you can lose with probability 0.3, win with probability 0.5 and win with probability 0.2.
1. Research indicates that the 1,000,000 cars in your city experience unrecoverable losses of per year from theft, collisions, and so on. If 30% of premiums are used to cover expenses, what premium
15. Discuss the effects of a regulation that allows all currently illegal workers to become contributors to Social Security.
14. What is a pay-as-you-go pension plan?
13. Why have private pension plans grown rapidly in recent years?
12. Most rich countries have increasingly aging populations. Discuss the effect of this tendency on pay-as-you-go systems.
11. As technology improves over time, fewer workers are needed to produce the same goods as before. Do you think this might have an implication for pay-as-you-go systems?
10. What risks do property and casualty insurance policies protect against?
9. What is the difference between term life insurance and whole life insurance?
8. How are insurance companies able to predict their losses from claims accurately enough to let them price their policies such that they will make a profit?
7. Are most insurance companies organized as mutuals or stock companies?
6. Distinguish between independent agents and exclusive agents.
5. How do insurance companies protect themselves against losses due to adverse selection and moral hazard?
4. Distinguish between adverse selection and moral hazard as they relate to the insurance industry.
3. Suppose an insurance company decides to insure the earnings obtained by a professional tennis player (in the event of an injury), provided she does not engage in activities like skydiving or
2. Why do insurance companies not allow people to buy insurance on personally unrelated risks?
1. Camille is offered two options: (1) receive or (2) flip a coin and get if she loses or if she wins. Assuming Camille prefers the first option; would you say Camille is more or less prone to buy
2. The mutual fund industry publishes a fact book containing exhaustive data on the historic and current state of mutual funds. Go to www.ici.org, click on Research and Statistics, then on Fact
1. Morningstar is the best-known company that specializes in analysis and review of mutual funds. There are a number of Web sites that report Morningstar’s results. Go to www.quicken.com/
12. Unhappy with the results, the new investor then sells the 389.09 shares. What is his profit? What is the new fund value?
11. On January 3 the prices at 4:00 p.m. are as follows:Stock Shares owned Price 1 1,000 $1.92 2 5,000 $51.18 3 2,800 $29.08 4 9,900 $67.19 5 3,000 $4.51 Cash n.a. $5,353.40Calculate the new NAV.
10. To discourage short-term investing in its fund, the fund now charges a 5% front-end load and a 2% back-end load. The same investor decides to put back into the fund. Calculate the new number of
9. Assume the new investor then sells the 420 shares. What is his profit? What is the annualized return? The fund sells 800 shares of stock 4 to raise the needed funds. Assume 250 trading days per
8. On January 2 the prices at 4:00 p.m. are as follows:Stock Shares owned Price 1 1,000 $2.03 2 5,000 $51.37 3 2,800 $29.08 4 10,000 $67.19 5 3,000 $4.42 Cash n.a. $2,4080.00Calculate the net asset
7. An investor sends the fund a check for . If there is no front-end load, calculate the new number of shares and price per share. Assume the manager purchases 1,800 shares of stock 3, and the rest
6. On December 31 a mutual fund has the following assets and prices at 4:00 p.m.Stock Shares owned Price 1 1,000 $1.97 2 5,000 $48.26 3 1,000 $26.44 4 10,000 $67.49 5 3,000 $2.59Calculate the net
5. Calculate the NAV of the following fund if 5,000,000 shares are outstanding. Assuming you bought shares in this fund a year ago at , determine the yield on your investment.Stock (at current market
4. Calculate the NAV of the following fund, assuming 3,500 shares are outstanding. Calculate the percentage change in the NAV of the fund if stock C climbs to .Stock Shares owned Price A 500 B 6,000
3. A mutual fund offers “A” shares, which have a 5% front-end load and an expense ratio of 0.76%. The fund also offers “B” shares, which have a 3% back-end load and an expense ratio of 0.87%.
2. A mutual fund reported year-end total assets of . Determine the expense ratio if total fees amounted to .
1. A mutual fund charges a 4.2% front-end load. Determine the maximum annual expense ratio you will be willing to pay if you do not want to pay more than 1.7% in fees per year (assume you will hold
15. What regulatory changes have been adopted or are being considered to deal with abuses in the mutual fund industry?
14. What is market timing when applied to mutual funds?
13. What is late trading when applied to mutual funds?
12. What is the primary source of the conflict of interest between shareholders and investment managers?

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