Question 1

The most important reason to hedge business risk is to reduce ____.

Accepted Answer

A)  the chance of a business takeover 
B)  employee theft 
C)  management inaccuracies 
D)  the chance of financial distress 
A)  the chance of a business takeover 
B)  employee theft 
C)  management inaccuracies 
D)  the chance of financial distress

Question 2

Currency and commodity price volatility is a component of which of the following types of risk?

Accepted Answer

A)  Systematic risk 
B)  Unsystematic risk 
C)  Operational risk 
D)  Nondiversifiable risk 
A)  Systematic risk 
B)  Unsystematic risk 
C)  Operational risk 
D)  Nondiversifiable risk

Question 3

Which of the following statements is (are) correct about a forward contract? 
I. Forward contracts require a good faith deposit before an agreement can be reached.
II. Forward contracts are considered extremely risky since the price for the asset is determined when the contract matures.

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 4

Which of the following statements is (are) correct about the reasons why hedging is difficult to do perfectly?
I.Available futures contract sizes may not match the hedging needs of the firm.
II. There may be a change in the relationship between the futures price and the local spot price.

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 5

Marking to market is a procedure for ____ contracts.

Accepted Answer

A)  futures 
B)  forwards 
C)  margin 
D)  implied 
A)  futures 
B)  forwards 
C)  margin 
D)  implied

Question 6

A long hedge requires ____ a futures contract.

Accepted Answer

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

Question 7

Reason(s) to manage risk by hedging include(s) which of the following?
 I. To be able to have needed cash flows
II. To reduce the chance of financial loss

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 8

Which of the following statements about diversification is (are) correct? 
I. Diversification may be able to reduce the risk of a portfolio to less than the weighted average risk of the assets.
II. Diversification is always prudent and should be expanded to include new, unrelated products whenever possible.

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 9

What options does the buyer of a futures contract have at the time the futures contract matures?

Accepted Answer

The futures contract buyer can take deli

Question 10

Which of the following is the most important reason for firms to use risk management techniques?

Accepted Answer

A)  To make supernormal profits 
B)  To reduce the chance of catastrophic financial distress 
C)  To reduce management's liability 
D)  To control inventory losses 
A)  To make supernormal profits 
B)  To reduce the chance of catastrophic financial distress 
C)  To reduce management's liability 
D)  To control inventory losses

Question 11

Financial derivatives can be used to manage all except which of the following risks?

Accepted Answer

A)  Earnings risks 
B)  Currency risks 
C)  Pricing risks 
D)  Interest rate risks 
A)  Earnings risks 
B)  Currency risks 
C)  Pricing risks 
D)  Interest rate risks

Question 12

Which of the following statements about hedging of business risks by investors is (are) correct?
 I. Operational information about companies is widely available and investors find it relatively simple to hedge business risk.
II. Investors have the necessary capital required to implement hedging strategies and do so consistently.

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 13

Which of the following statements about risk is (are) correct? 
I. Risk is the possibility that the actual cash flows will be different from the expected cash flows.
II. Risk management is utilized by companies to provide a chance to make a quick profit.

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 14

What is a hedge?

Accepted Answer

A hedge is a transaction that limits the

Question 15

Which of the following is not a derivative security?

Accepted Answer

A)  Forwards 
B)  Margins 
C)  Futures 
D)  Options 
A)  Forwards 
B)  Margins 
C)  Futures 
D)  Options

Question 16

What is marking to market and how is this process guaranteed?

Accepted Answer

Futures contracts require daily settleme

Question 17

Acquisition of additional information can be accomplished by all except which of the following?

Accepted Answer

A)  Employing individuals or firms with the needed expertise 
B)  Test-marketing 
C)  Paying to have new issues of bonds "rated" 
D)  Changing the location of the distributorship 
A)  Employing individuals or firms with the needed expertise 
B)  Test-marketing 
C)  Paying to have new issues of bonds "rated" 
D)  Changing the location of the distributorship

Question 18

Which of the following is not a method whereby a hedge is accomplished?

Accepted Answer

A)  Using derivative securities 
B)  Owning several shares of a company's stock 
C)  Buying or selling a forward contract 
D)  Using an option in the cash market 
A)  Using derivative securities 
B)  Owning several shares of a company's stock 
C)  Buying or selling a forward contract 
D)  Using an option in the cash market

Question 19

Forward contracts are said to possess ____ risk.

Accepted Answer

A)  business 
B)  financial 
C)  performance 
D)  spot 
A)  business 
B)  financial 
C)  performance 
D)  spot

Question 20

Which of the following is not a reason to reduce financial distress?

Accepted Answer

A)  Enhanced debt capacity 
B)  Reduced WACC 
C)  Better currency exchange ratio 
D)  Ensure adequate cash flows 
A)  Enhanced debt capacity 
B)  Reduced WACC 
C)  Better currency exchange ratio 
D)  Ensure adequate cash flows

Exam 25: Risk Management

The most important reason to hedge business risk is to reduce ____.

Currency and commodity price volatility is a component of which of the following types of risk?

Which of the following statements is (are) correct about a forward contract? I. Forward contracts require a good faith deposit before an agreement can be reached. II. Forward contracts are considered extremely risky since the price for the asset is determined when the contract matures.

Which of the following statements is (are) correct about the reasons why hedging is difficult to do perfectly? I.Available futures contract sizes may not match the hedging needs of the firm. II. There may be a change in the relationship between the futures price and the local spot price.

Marking to market is a procedure for ____ contracts.

A long hedge requires ____ a futures contract.

Reason(s) to manage risk by hedging include(s) which of the following? I. To be able to have needed cash flows II. To reduce the chance of financial loss

What options does the buyer of a futures contract have at the time the futures contract matures?

Which of the following is the most important reason for firms to use risk management techniques?

Financial derivatives can be used to manage all except which of the following risks?

Which of the following statements about risk is (are) correct? I. Risk is the possibility that the actual cash flows will be different from the expected cash flows. II. Risk management is utilized by companies to provide a chance to make a quick profit.

What is a hedge?

Which of the following is not a derivative security?

What is marking to market and how is this process guaranteed?

Acquisition of additional information can be accomplished by all except which of the following?

Which of the following is not a method whereby a hedge is accomplished?

Forward contracts are said to possess ____ risk.

Which of the following is not a reason to reduce financial distress?

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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