Starbucks (SBUX) buys all of its coffee beans

Starbucks (SBUX) buys all of its coffee beans on the spot market. Managers believe that price increases and price decreases average out over time and hedging with forward contracts is too costly. True FalseQUESTION 12Country risk limits set by management of a multi-national industrial company are irrational since the company is obligated to take on as many profitable projects as possible no matter where the project is located. True FalseQUESTION 13A book publisher tries to publish 100 titles each year from 100 different authors. The books are evenly split between fiction and non-fiction. This is an example of using diversification to manage business risk. True FalseQUESTION 14Lam points out that if increasing insurance premiums make ART solutions more economical. If ART solutions prove successful, then they draw in new users increasing the liquidity and transparency of the market for ART solutions. True FalseQUESTION 15Company X issues fixed income 30 year bonds with the following characteristics; If Company X is downgraded from AAA to A the coupon on the bond falls from 4% to 3%. This bond would be an example of Alternative Risk Transfer. True FalseQUESTION 16One oat futures contract is an obligation for the buyer to deliver 5000 bushels of oats in return for a fixed price on a fixed date. True False QUESTION 17A restaurant chain is hyper concerned about products in its supply chain that could be contaminated. The company’s CEO has hired a team to manage supply chain risk. The purchasing unit is given the objective of minimizing costs. The supply chain managers and purchasing managers have potentially conflicting objectives. True FalseQUESTION 18Enterprise risk management is based on placing risks into silos not evaluating the aggregate of risk. True FalseQUESTION 19One oat futures contract traded on the CME is an obligation for the buyer to purchase 5000 bushels of oats at a fixed price on a fixed date. True FalseQUESTION 20The use of financial leverage by a company will magnify the return on equity relative to the firm when it is unleveraged. True False QUESTION 21In a rational enterprise risk management system risks are siloed and then managed separately. This facilitates risk management and makes overall management of risk more consistent with the objectives of management. True False QUESTION 22An example of unbundling risks would be a farmer selling all of its harvests on the spot market. True FalseQUESTION 23Lam suggests a company can be viewed as a portfolio of businesses. True FalseQUESTION 24General Mills (GIS) would most likely take short positions in oat futures. True False QUESTION 25One major difference between weather insurance and weather derivatives is that the insurance product is a capital market instrument and weather derivatives are not. True FalseQUESTION 26An effective transfer of risk will lower the amount of equity the firm needs to operate. This will in turn enable the firm to further expand its balance sheet with debt. True FalseQUESTION 27Insurance Company X has issued $1 billion of hurricane insurance. Management decides to lay-off part of this risk via reinsurance. They look for companies willing to insure claims above $500 million associated with its current portfolio of hurricane policies. The credit rating of the reinsurance company should not be of any concern to Insurance Company X. This is because insurance companies are well capitalized. True FalseQUESTION 28Oat futures contracts traded on the CME are only available for ddelivery of oats two months into the future. This is why most companies that use oats rely on forward contracts. True FalseQUESTION 29A company can use futures and forward contracts to change its risk profile. True FalseQUESTION 30Insurance contracts are a way for a business to transfer risk. True False QUESTION 31Risk transfer is the same as risk elimination. True FalseQUESTION 32If a company can be viewed as a portfolio of businesses, then GE is more well diversified than Shake Shack. True FalseQUESTION 33When a household buys fire insurance it is transferring, the loss associated with a fire to an insurance company. True FalseQUESTION 34Oat futures contracts traded on the CME are only available for two months into the future. This is why most companies that use oats rely on forward contracts. True FalseQUESTION 35Starbucks (SBUX) uses forward contracts to hedge the price of coffee beans. True False QUESTION 36A book publisher that publishes only spy novels would be more diversified than a publisher that publishes many genres. True FalseQUESTION 37Insurance linked bonds can be used to transfer natural disaster risk that a company may be exposed to. For example, a bond linked to an earthquake event is issued the borrower would not have to make interest and principal payments to investors once the earthquake event occurs. In effect, financial risk associated with the earth quake is transferred borrower the borrower to the lender. True FalseQUESTION 38Managers of General Mills (GIS) use derivative contracts to speculate on the future prices of commodity inputs. True FalseQUESTION 39General Mills (GIS) would most likely take long positions in oat futures. True FalseQUESTION 40An advantage of aggregating risks in a company is that it will incorporate natural hedges that exist. For example, a company may have one subsidiary that is long dollars and another that is short dollars. If the risks of the two subsidiaries are not aggregated, then this natural currency hedge for the company may not be identified. True FalseQUESTION 41Counterparty risk would include the risk that the party that has agreed to pay your company in the event of outcome X cannot or will not make the payment in a timely manner. True False QUESTION 42A capital market instrument like a weather derivative is more liquid than an insurance product that seeks to accomplish the same risk transfer. Liquidity should mean it is easier to close out the position prior to its expiration and bring more transparent pricing into the market for transferring weather related risks. True False

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