Question 1

Which one of the following will be least helpful in offsetting a company's costs from a loss event?

Accepted Answer

A)  Self-insurance pool of cash 
B)  Insurance policy exclusion 
C)  Abidance with policy notification provisions 
D)  Currently paid insurance premiums 
E)  Low insurance deductible 
A)  Self-insurance pool of cash 
B)  Insurance policy exclusion 
C)  Abidance with policy notification provisions 
D)  Currently paid insurance premiums 
E)  Low insurance deductible B

Question 2

Suppose that last month you purchased ten January crude oil futures contracts at a quoted price of 53.88. These contracts are based on 1,000 barrels and quoted in dollars per barrel. Assume the actual price per barrel is $56.20 in January. How much did you gain or lose by hedging your position?

Accepted Answer

A)  $23,200 
B)  $2,320 
C)  $0 
D)  −$2,320 
E)  −$23,200 
A)  $23,200 
B)  $2,320 
C)  $0 
D)  −$2,320 
E)  −$23,200 A

Question 3

Suppose you sold three September cocoa futures contracts at a price quote of 1,696. Cocoa futures contracts are based on 10 metric tons and priced in dollars per ton. What will be your profit or loss on this contract if the price turns out to be $1,707 per metric ton at expiration?

Accepted Answer

A)  $330 
B)  −$330 
C)  $110 
D)  −$110 
E)  $150 
A)  $330 
B)  −$330 
C)  $110 
D)  −$110 
E)  $150 B

Question 4

By definition, which one of the following contracts is marked to the market on a daily basis?

Accepted Answer

A)  Forward contract 
B)  Spot contract 
C)  Option contract 
D)  Swap 
E)  Futures contract 
A)  Forward contract 
B)  Spot contract 
C)  Option contract 
D)  Swap 
E)  Futures contract

Question 5

Most of the evidence to date indicates that firms with which two of the following characteristics are most apt to frequently use derivatives?

Accepted Answer

A)  Low financial distress costs and constrained access to capital markets 
B)  Small in size and low financial distress costs 
C)  Easy access to capital markets and high financial distress costs 
D)  High financial distress costs and constrained access to capital markets 
E)  High financial distress costs and easy access to capital markets 
A)  Low financial distress costs and constrained access to capital markets 
B)  Small in size and low financial distress costs 
C)  Easy access to capital markets and high financial distress costs 
D)  High financial distress costs and constrained access to capital markets 
E)  High financial distress costs and easy access to capital markets

Question 6

Which one of these statements related to forward contracts is correct?

Accepted Answer

A)  The buyer of a forward contract on corn benefits if the price of corn increases during the contract period. 
B)  The buyer of a forward contract has the right, but not the obligation, to execute the contract any time up to and including the settlement date. 
C)  Forward contracts cannot be sold but must be executed by the original parties to the contract. 
D)  Forward contracts recognize profits and losses on a daily basis. 
E)  The price at which a forward contract closes is set equal to the closing spot price on the settlement date. 
A)  The buyer of a forward contract on corn benefits if the price of corn increases during the contract period. 
B)  The buyer of a forward contract has the right, but not the obligation, to execute the contract any time up to and including the settlement date. 
C)  Forward contracts cannot be sold but must be executed by the original parties to the contract. 
D)  Forward contracts recognize profits and losses on a daily basis. 
E)  The price at which a forward contract closes is set equal to the closing spot price on the settlement date.

Question 7

Company A can borrow money at a fixed rate of 7.5 percent or a variable rate set at prime plus 1 percent. Company B can borrow money at a variable rate of prime plus .5 percent or a fixed rate of 8 percent. Company A prefers a variable rate and Company B prefers a fixed rate. Which one of the following statements depicts the most favorable outcome of a swap between Companies A and B?

Accepted Answer

A)  Company A could pay a fixed rate of 7.25 percent. 
B)  Company A could pay a fixed rate of 7.75 percent. 
C)  Company B could pay a fixed rate of 8 percent. 
D)  Company B could pay the variable prime rate + 1 percent. 
E)  Company A could pay the variable prime rate + .75 percent. 
A)  Company A could pay a fixed rate of 7.25 percent. 
B)  Company A could pay a fixed rate of 7.75 percent. 
C)  Company B could pay a fixed rate of 8 percent. 
D)  Company B could pay the variable prime rate + 1 percent. 
E)  Company A could pay the variable prime rate + .75 percent.

Question 8

Assume you are looking at a payoff profile for a forward contract on oil. Which one of these statements correctly describes what you are seeing?

Accepted Answer

A)  From the buyer's perspective, the payoff profile is downward sloping. 
B)  From both the buyer's and the seller's perspectives, the payoff profile is upward sloping. 
C)  The vertical axis depicts changes in the price of oil. 
D)  From the seller's perspective, the payoff profile is downward sloping. 
E)  The horizontal axis represents the changes in contract value. 
A)  From the buyer's perspective, the payoff profile is downward sloping. 
B)  From both the buyer's and the seller's perspectives, the payoff profile is upward sloping. 
C)  The vertical axis depicts changes in the price of oil. 
D)  From the seller's perspective, the payoff profile is downward sloping. 
E)  The horizontal axis represents the changes in contract value.

Question 9

Suppose a novice investor buys a call option on 45,000 barrels of oil with an exercise price of $45 per barrel and simultaneously buys a put option on 45,000 barrels of oil with the same exercise price of $45 per barrel. Her net payoff per barrel on these option contracts is ________ if the market price per barrel is $43 and ________ if the price per barrel is $47.

Accepted Answer

A)  −$2; $2 
B)  −$2; $0 
C)  $0; $2 
D)  $2; −$2 
E)  $2; $2 
A)  −$2; $2 
B)  −$2; $0 
C)  $0; $2 
D)  $2; −$2 
E)  $2; $2

Question 10

Futures contracts:

Accepted Answer

A)  are identical to forward contracts except for the size of the contract. 
B)  provide an option to purchase an asset at a specified price on the settlement date. 
C)  are marked to the market on a daily basis which helps eliminate credit risk. 
D)  are less popular in organized trading then are forward contracts. 
E)  are limited to contracts on financial assets. 
A)  are identical to forward contracts except for the size of the contract. 
B)  provide an option to purchase an asset at a specified price on the settlement date. 
C)  are marked to the market on a daily basis which helps eliminate credit risk. 
D)  are less popular in organized trading then are forward contracts. 
E)  are limited to contracts on financial assets.

Question 11

A firm with a variable-rate loan wants to protect itself solely from increases in interest rates. Which one of the following would be of most interest to this firm?

Accepted Answer

A)  Create an interest rate collar 
B)  Create an interest rate floor 
C)  Buy a put option on interest rates 
D)  Enter a currency futures contract 
E)  Buy a put option on a bond 
A)  Create an interest rate collar 
B)  Create an interest rate floor 
C)  Buy a put option on interest rates 
D)  Enter a currency futures contract 
E)  Buy a put option on a bond

Question 12

Which one of the following can a firm do if it effectively manages its financial risks?

Accepted Answer

A)  Eliminate all of the risks faced by the firm 
B)  Totally eliminate all financial risks 
C)  Reduce the price volatility the firm faces 
D)  Guarantee the firm's financial success 
E)  Avoid all long-term financial risks 
A)  Eliminate all of the risks faced by the firm 
B)  Totally eliminate all financial risks 
C)  Reduce the price volatility the firm faces 
D)  Guarantee the firm's financial success 
E)  Avoid all long-term financial risks

Question 13

When a futures call option on a commodity is exercised the option owner receives a futures contract on the commodity plus a cash payment equal to the difference between the:

Accepted Answer

A)  current options price and the current futures price. 
B)  spot and forward futures prices. 
C)  strike price on the option and the current futures price. 
D)  exercise price and the current options price. 
E)  exercise price and the strike price. 
A)  current options price and the current futures price. 
B)  spot and forward futures prices. 
C)  strike price on the option and the current futures price. 
D)  exercise price and the current options price. 
E)  exercise price and the strike price.

Question 14

Which type of insurance protects against the risks related to a defective manufactured product?

Accepted Answer

A)  Business interruption insurance 
B)  Employer's liability insurance 
C)  Property insurance 
D)  Vehicle insurance 
E)  Commercial liability insurance 
A)  Business interruption insurance 
B)  Employer's liability insurance 
C)  Property insurance 
D)  Vehicle insurance 
E)  Commercial liability insurance

Question 15

The first step in risk management is to:

Accepted Answer

A)  purchase liability insurance. 
B)  create an emergency cash fund. 
C)  establish prevention programs. 
D)  eliminate all international risks. 
E)  identify and eliminate all strategic risks. 
A)  purchase liability insurance. 
B)  create an emergency cash fund. 
C)  establish prevention programs. 
D)  eliminate all international risks. 
E)  identify and eliminate all strategic risks.

Question 16

In any one year, the chance that you will incur a loss of $10 million is .02 percent. Otherwise, you will have zero loss. What is your expected loss?

Accepted Answer

A)  $20,000 
B)  $200,000 
C)  $2,000 
D)  $200 
E)  $2,000,000 
A)  $20,000 
B)  $200,000 
C)  $2,000 
D)  $200 
E)  $2,000,000

Question 17

The value of a stock option is dependent upon the value of the underlying stock. Thus, a stock option is a:

Accepted Answer

A)  forward agreement. 
B)  derivative security. 
C)  mezzanine asset. 
D)  contingent security. 
E)  junior security. 
A)  forward agreement. 
B)  derivative security. 
C)  mezzanine asset. 
D)  contingent security. 
E)  junior security.

Question 18

Interest rate swaps:

Accepted Answer

A)  are a group of option contracts with varying expiration dates. 
B)  are rarely used by U.S. business firms. 
C)  can involve exchanging one floating-rate loan for another floating-rate loan. 
D)  require two firms to have access to loans with equivalent terms. 
E)  are all based on the U.S. T-bill index. 
A)  are a group of option contracts with varying expiration dates. 
B)  are rarely used by U.S. business firms. 
C)  can involve exchanging one floating-rate loan for another floating-rate loan. 
D)  require two firms to have access to loans with equivalent terms. 
E)  are all based on the U.S. T-bill index.

Question 19

Which one of the following statements related to swaps is correct?

Accepted Answer

A)  Brokerage firms are the dominant swap dealers in the U.S. 
B)  Swaps can be custom tailored to a firm's needs. 
C)  As of 2017, all swaps are traded on a single organized exchange. 
D)  Swaps contracts are limited to interest rates. 
E)  Swap contracts are limited to a single payment at expiration. 
A)  Brokerage firms are the dominant swap dealers in the U.S. 
B)  Swaps can be custom tailored to a firm's needs. 
C)  As of 2017, all swaps are traded on a single organized exchange. 
D)  Swaps contracts are limited to interest rates. 
E)  Swap contracts are limited to a single payment at expiration.

Question 20

Futures option quotes include an apostrophe. This apostrophe indicates the contracts are traded:

Accepted Answer

A)  only at the end of day price. 
B)  weekly. 
C)  in eighths. 
D)  in 64ths. 
E)  in 32nds. 
A)  only at the end of day price. 
B)  weekly. 
C)  in eighths. 
D)  in 64ths. 
E)  in 32nds.

Exam 23: Enterprise Risk Management

Which one of the following will be least helpful in offsetting a company's costs from a loss event?

Suppose that last month you purchased ten January crude oil futures contracts at a quoted price of 53.88. These contracts are based on 1,000 barrels and quoted in dollars per barrel. Assume the actual price per barrel is $56.20 in January. How much did you gain or lose by hedging your position?

Suppose you sold three September cocoa futures contracts at a price quote of 1,696. Cocoa futures contracts are based on 10 metric tons and priced in dollars per ton. What will be your profit or loss on this contract if the price turns out to be $1,707 per metric ton at expiration?

By definition, which one of the following contracts is marked to the market on a daily basis?

Most of the evidence to date indicates that firms with which two of the following characteristics are most apt to frequently use derivatives?

Which one of these statements related to forward contracts is correct?

Assume you are looking at a payoff profile for a forward contract on oil. Which one of these statements correctly describes what you are seeing?

Futures contracts:

A firm with a variable-rate loan wants to protect itself solely from increases in interest rates. Which one of the following would be of most interest to this firm?

Which one of the following can a firm do if it effectively manages its financial risks?

When a futures call option on a commodity is exercised the option owner receives a futures contract on the commodity plus a cash payment equal to the difference between the:

Which type of insurance protects against the risks related to a defective manufactured product?

The first step in risk management is to:

In any one year, the chance that you will incur a loss of $10 million is .02 percent. Otherwise, you will have zero loss. What is your expected loss?

The value of a stock option is dependent upon the value of the underlying stock. Thus, a stock option is a:

Interest rate swaps:

Which one of the following statements related to swaps is correct?

Futures option quotes include an apostrophe. This apostrophe indicates the contracts are traded:

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working with Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons from Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Leasing

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