Question 1

Which of the following describes basis risk?

Accepted Answer

A)  A natural disaster that affects the underlying commodity 
B)  The risk that the commodity is not marketable 
C)  The variance in the price of the commodity and the value of the American dollar 
D)  A change in the relationship between the futures price and the local spot price 
A)  A natural disaster that affects the underlying commodity 
B)  The risk that the commodity is not marketable 
C)  The variance in the price of the commodity and the value of the American dollar 
D)  A change in the relationship between the futures price and the local spot price D

Question 2

An example of hedging to control currency exchange rate risk is a wine distributor ____.

Accepted Answer

A)  currently importing wine made from the 2010 vintage 
B)  paying for wine today that will be delivered in three years 
C)  that visits the vineyard where wine is made before buying the vintage 
D)  that settles all of its bills with euros 
A)  currently importing wine made from the 2010 vintage 
B)  paying for wine today that will be delivered in three years 
C)  that visits the vineyard where wine is made before buying the vintage 
D)  that settles all of its bills with euros B

Question 3

Which of the following is (are) a company's largest risk?
I. Exchange rate risk
II. Future raw material price risk

Accepted Answer

A)  Only statement I is correct. 
B)  Only statement II is correct. 
C)  Both statements I and II are correct. 
D)  Neither statement I nor II is correct. 
A)  Only statement I is correct. 
B)  Only statement II is correct. 
C)  Both statements I and II are correct. 
D)  Neither statement I nor II is correct. C

Question 4

A risk that shareholder wealth-maximizing managers should seek to offset in the firm that they are managing is _____ risk.

Accepted Answer

A)  dividend payout 
B)  exchange rate 
C)  research and development 
D)  leasing 
A)  dividend payout 
B)  exchange rate 
C)  research and development 
D)  leasing

Question 5

All except which of the following are nonhedging strategies that can be used to manage business risk?

Accepted Answer

A)  Acquisition of additional information 
B)  Forward contracts 
C)  Diversification 
D)  Insurance 
A)  Acquisition of additional information 
B)  Forward contracts 
C)  Diversification 
D)  Insurance

Question 6

A "clearinghouse" operated by the futures exchange handles the ____.

Accepted Answer

A)  offices of the future contract buyers 
B)  location of the future contract sellers 
C)  payments between buyers and sellers 
D)  actual products bought and sold 
A)  offices of the future contract buyers 
B)  location of the future contract sellers 
C)  payments between buyers and sellers 
D)  actual products bought and sold

Question 7

A futures contract is a(n) ____ contract.

Accepted Answer

A)  implied 
B)  negotiated 
C)  standardized 
D)  variable 
A)  implied 
B)  negotiated 
C)  standardized 
D)  variable

Question 8

A short hedge requires ____ a futures contract.

Accepted Answer

A)  margining 
B)  creating 
C)  the buying of 
D)  the selling of 
A)  margining 
B)  creating 
C)  the buying of 
D)  the selling of

Question 9

An example of hedging to control risk would be ____.

Accepted Answer

A)  car makers reducing the number of models that will be manufactured this year 
B)  toy stores placing orders in December for toys needed by Christmas 
C)  airline companies attempting to lock in the price paid for fuel 
D)  fashion designers offering showings of their new clothing line in several major cities 
A)  car makers reducing the number of models that will be manufactured this year 
B)  toy stores placing orders in December for toys needed by Christmas 
C)  airline companies attempting to lock in the price paid for fuel 
D)  fashion designers offering showings of their new clothing line in several major cities

Question 10

Which of the following is a firm-specific asset?

Accepted Answer

A)  Sewing machines designed for the manufacture of summer and winter clothes 
B)  Fire-retardant paint in lime green 
C)  Auto plant that can produce six styles of vehicles 
D)  A manufacturing plant that makes spiral staircases, wood railings and stairway carpeting 
A)  Sewing machines designed for the manufacture of summer and winter clothes 
B)  Fire-retardant paint in lime green 
C)  Auto plant that can produce six styles of vehicles 
D)  A manufacturing plant that makes spiral staircases, wood railings and stairway carpeting

Question 11

Which of the following statements about risk management strategy is (are) correct?
I. It reduces the variability of a firm's expected cash flows.
II. It reduces the chance of catastrophic financial distress.

Accepted Answer

A)  Only statement I is correct. 
B)  Only statement II is correct. 
C)  Both statements I and II are correct. 
D)  Neither statement I nor II is correct. 
A)  Only statement I is correct. 
B)  Only statement II is correct. 
C)  Both statements I and II are correct. 
D)  Neither statement I nor II is correct.

Question 12

In the futures market, losers must pay winners each day. This is called ____.

Accepted Answer

A)  paying up 
B)  selling short 
C)  taking a long position 
D)  marking to market 
A)  paying up 
B)  selling short 
C)  taking a long position 
D)  marking to market

Question 13

Which of the following is the current price in a futures contract?

Accepted Answer

A)  Volatile price 
B)  Spot price 
C)  Short price 
D)  Long price 
A)  Volatile price 
B)  Spot price 
C)  Short price 
D)  Long price

Question 14

Which of the following is a related benefit of hedging external risks for a company?

Accepted Answer

A)  Management can determine international markets for their product. 
B)  Management can forecast political events that may impact their sales. 
C)  Management can focus on performance and compensation factors that are under their control. 
D)  Management can determine the economic forces that will impact their earnings. 
A)  Management can determine international markets for their product. 
B)  Management can forecast political events that may impact their sales. 
C)  Management can focus on performance and compensation factors that are under their control. 
D)  Management can determine the economic forces that will impact their earnings.

Question 15

Which of the following is generally used to enforce rights under patents and copyrights?

Accepted Answer

A)  Legal action 
B)  Takeover threats 
C)  Diversification 
D)  Retained earnings 
A)  Legal action 
B)  Takeover threats 
C)  Diversification 
D)  Retained earnings

Question 16

Forward contracts are most common in ____ markets.

Accepted Answer

A)  stock 
B)  agricultural 
C)  currency 
D)  bond 
A)  stock 
B)  agricultural 
C)  currency 
D)  bond

Question 17

Which of the following is a loss that companies would self-insure?

Accepted Answer

A)  Product breakage 
B)  Fraud 
C)  Unexpected business interruptions 
D)  Officer liability 
A)  Product breakage 
B)  Fraud 
C)  Unexpected business interruptions 
D)  Officer liability

Question 18

Which of the following statements is (are) true about futures contracts?
 I. The buyer of the contract must take delivery of the underlying commodity.
II. To reverse a position, the buyer of a contract must sell an identical contract which is recognized as offsetting the other one.

Accepted Answer

A)  Only statement I is correct. 
B)  Only statement II is correct. 
C)  Both statements I and II are correct. 
D)  Neither statement I nor II is correct. 
A)  Only statement I is correct. 
B)  Only statement II is correct. 
C)  Both statements I and II are correct. 
D)  Neither statement I nor II is correct.

Question 19

A firm can reduce risk by gaining control over the operating environment. Which of the following is an example?

Accepted Answer

A)  Using general purpose assets. 
B)  Hedging through a futures contract. 
C)  Increasing the customer base. 
D)  Using patents and copyrights. 
A)  Using general purpose assets. 
B)  Hedging through a futures contract. 
C)  Increasing the customer base. 
D)  Using patents and copyrights.

Question 20

Firms work to diversify. Which of the following is not a diversification method that firms use?

Accepted Answer

A)  Firms seek to expand the customer base. 
B)  Firms seek to obtain raw materials from several suppliers. 
C)  Firms seek to isolate their product by selling to a single niche market. 
D)  Firms seek to produce more than one product. 
A)  Firms seek to expand the customer base. 
B)  Firms seek to obtain raw materials from several suppliers. 
C)  Firms seek to isolate their product by selling to a single niche market. 
D)  Firms seek to produce more than one product.

Exam 25: Risk Management

Which of the following describes basis risk?

An example of hedging to control currency exchange rate risk is a wine distributor ____.

Which of the following is (are) a company's largest risk? I. Exchange rate risk II. Future raw material price risk

A risk that shareholder wealth-maximizing managers should seek to offset in the firm that they are managing is _____ risk.

All except which of the following are nonhedging strategies that can be used to manage business risk?

A "clearinghouse" operated by the futures exchange handles the ____.

A futures contract is a(n) ____ contract.

A short hedge requires ____ a futures contract.

An example of hedging to control risk would be ____.

Which of the following is a firm-specific asset?

Which of the following statements about risk management strategy is (are) correct? I. It reduces the variability of a firm's expected cash flows. II. It reduces the chance of catastrophic financial distress.

In the futures market, losers must pay winners each day. This is called ____.

Which of the following is the current price in a futures contract?

Which of the following is a related benefit of hedging external risks for a company?

Which of the following is generally used to enforce rights under patents and copyrights?

Forward contracts are most common in ____ markets.

Which of the following is a loss that companies would self-insure?

Which of the following statements is (are) true about futures contracts? I. The buyer of the contract must take delivery of the underlying commodity. II. To reverse a position, the buyer of a contract must sell an identical contract which is recognized as offsetting the other one.

A firm can reduce risk by gaining control over the operating environment. Which of the following is an example?

Firms work to diversify. Which of the following is not a diversification method that firms use?

The Role and Objective of Financial Management

The Domestic and International Financial Marketplace

Evaluation of Financial Performance

Financial Planning and Forecasting

The Time Value of Money

Continuous Compounding and Discounting

Fixed Income Securities: Characteristics and Valuation

Common Stock: Characteristics, Valuation, and Issuance

Analysis of Risk and Return

Capital Budgeting and Cash Flow Analysis

Mutually Exclusive Investments Having Unequal Lives

Capital Budgeting: Decision Criteria and Real Option Considerations

Capital Budgeting and Risk

The Cost of Capital

Capital Structure Concepts

Breakeven Analysis

Capital Structure Management in Practice

Dividend Policy

Working Capital Policy and Short-Term Financing

The Management of Cash and Marketable Securities

The Management of Accounts Receivable and Inventories

Lease and Intermediate Term Financing

Financing With Derivatives

Bond Refunding Analysis

International Financial Management

Corporate Restructuring

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