For life insurance policies, some of the premium pays for the cost of the insurance and the remainder goes toward the cash value of the policy and earns interest like a savings account. Suppose that on the cash value of their policies, one insurance company pays $4.8 \%$ compounded monthly and another pays $4.82 \%$ compounded semiannually. Which company offers a higher yield?

Credit scorecards were designed to be used to help financial institutions make decisions about loan applications. However, some insurance companies have suggested that credit scores could also be used to determine insurance premiums, particularly car insurance. The Massachusetts Public Interest Research Group has come out against this proposal. To acquire more information, an executive for a car-insurance company gathered data about a random sample of the company’s customers. She recorded whether the individual was involved in an accident in the last 3 years and determined the credit score. Can the executive infer that there is a difference in scores between those who did and those who did not have accidents in a 3-year period?

Which of the following is not covered in the standard fire policy? (a) losses due to fire (b) losses due to lightning strikes (c) losses due to inept attorneys (d) none of the above are covered.

For the following scenarios, describe a hedging strategy using futures contracts that might be considered. If you think that a crosshedge would be appropriate, discuss the reasons for your choice of contract.

a. A public utility is concerned about rising costs.
b. A candy manufacturer is concerned about rising costs.
c. A corn farmer fears that this year's harvest will be at record high levels across the country.
d. A manufacturer of photographic film is concerned about rising costs.
e. A natural gas producer believes there will be excess supply in the market this year.
f. A bank derives all its income from long-term, fixed-rate residential mortgages.

Future financial managers will need:

a. to understand international cash flows.

b. computerized funds transfers.

c. international currency hedging strategies.

d. All of the options

The 28 students in Mr. Starnes's introductory statistics class at The College of New Jersey (TCNJ) completed a brief survey. One of the questions asked whether each student was right- or left-handed. The two-way table below displays information on the gender and handedness of the students in the class.

$$\begin{matrix} \text{} & \text{Gender} & \text{} & \text{}\\ \text{Handedness} & \text{F} & \text{M} & \text{Row summary}\\ \text{L} & \text{3} & \text{1} & \text{4}\\ \text{R} & \text{18} & \text{6} & \text{24}\\ \text{Column summary} & \text{21} & \text{7} & \text{28}\\ \end{matrix}$$

 (a) Nationally, about $10\%$ of people are left-handed. Are the students in Mr. Starnes's class similar to the nation as a whole? Justify your answer. (b) What's the probability that a randomly selected student from the class is • male or right-handed? • male and right-handed?

If a U.S. company exports its goods to Japan, how would it use a futures contract on Japanese yen to hedge its exchange rate risk? Would it buy or sell yen futures? In answering, assume that the exchange rate quoted in the futures contract is quoted as dollars per yen.

Suppose a firm enters into a fixed-for-floating interest rate swap with a swap dealer. Describe the cash flows that will occur as a result of the swap.

A company has a large bond issue maturing in one year. When it matures, the company will float a new issue. Current interest rates are attractive, and the company is concerned that rates next year will be higher. What are some hedging strategies that the company might use in this case?

A company produces an energy-intensive product and uses natural gas as the energy source. The competition primarily uses oil. Explain why this company is exposed to fluctuations in both oil and natural gas prices.

If a textile manufacturer wanted to hedge against adverse movements in cotton prices, it could purchase cotton futures contracts or buy call options on cotton futures contracts. What would be the pros and cons of the two approaches?

In 2009 and 2010, investment banks were under fire for interest rate swaps sold to municipalities and nonprofits. For example, California's water resource authority paid about $305 million, North Carolina paid about$60 million, and Harvard University paid about $923 million to unwind swaps agreements. To unwind a swaps position, you make a reverse trade. For example, if you had agreed to a fixed-for-variable swap, you would enter a variable-for-fixed swap. The controversy was caused because many people felt that investment banks had taken advantage of municipalities and nonprofits. Is this argument correct? Why or why not?

Bubbling Crude Corporation, a large Texas oil producer, would like to hedge against adverse movements in the price of oil because this is the firm's primary source of revenue. What should the firm do? Provide at least two reasons why it probably will not be possible to achieve a completely flat risk profile with respect to oil prices.

Return to the case of the diagnostic scanner used in Problems 1 through 6 . Suppose the entire $\$ 4,800,000$ purchase price of the scanner is borrowed. The rate on the loan is 8 percent, and the loan will be repaid in equal installments. Create a lease-versus-buy analysis that explicitly incorporates the loan payments. Show that the NPV of leasing instead of buying is not changed from what it was in Problem 1. Why is this so?