Question 1

Financial futures are available to protect against all of the following except:

Accepted Answer

A) Interest-rate risk. 
B) Level of equity prices. 
C) Currency swap risk. 
D) Exchange-rate risk. 
A) Interest-rate risk. 
B) Level of equity prices. 
C) Currency swap risk. 
D) Exchange-rate risk.

Question 2

Why do companies hedge to reduce risk?

Accepted Answer

Fluctuations in commodity prices, intere

Question 3

Discuss the statement, "the better the risk management policies of a company, the greater a company's debt capacity".

Accepted Answer

It is true that successful risk manageme

Question 4

Discuss similarities and differences between futures contracts and forward contracts.

Accepted Answer

Both futures and forwards set an obligat

Question 5

Interest rate swaps allow both counterparties to:

Accepted Answer

A) reduce interest expenses. 
B) avoid repayment of the notional principal. 
C) rearrange the balance sheet. 
D) pay a floating rate of interest on their debt. 
A) reduce interest expenses. 
B) avoid repayment of the notional principal. 
C) rearrange the balance sheet. 
D) pay a floating rate of interest on their debt.

Question 6

Company A can borrow at a fixed rate of 9.5% and variable rate of Prime plus 1%.Company A prefers a fixed rate.Company B can borrow at 8% fixed rate and Prime plus 2%.Company B prefers a variable rate.Determine whether an interest rate swap will be beneficial to both parties..

Accepted Answer

@#IMG-DLM& The interest rate s

Question 7

One distinguishing difference between the buyer of a futures contract and the buyer of an option contract is that the futures buyer:

Accepted Answer

A) pays a much higher premium than option buyers. 
B) has an obligation to purchase, not a choice. 
C) can lose no more than the initial premium. 
D) has increased rather than reduced risk. 
A) pays a much higher premium than option buyers. 
B) has an obligation to purchase, not a choice. 
C) can lose no more than the initial premium. 
D) has increased rather than reduced risk.

Question 8

A gasoline distributor buys a gasoline futures contract that requires acceptance of 42,000 gallons of gasoline at $0.94 per gallon.How is the account marked to market if gasoline futures close the next day at $0.97?

Accepted Answer

A) A loss of $1,260 is posted to the account. 
B) A gain of $1,260 is posted to the account. 
C) A loss of $12,600 is posted to the account. 
D) A gain of $12,600 is posted to the account. 
A) A loss of $1,260 is posted to the account. 
B) A gain of $1,260 is posted to the account. 
C) A loss of $12,600 is posted to the account. 
D) A gain of $12,600 is posted to the account.

Question 9

A copper producer is worried about the copper prices going down.The risk of downward movement in prices can be hedged by taking one of the following positions.

Accepted Answer

A) Buying call options on copper. 
B) Selling copper futures. 
C) Buying copper futures. 
D) Selling copper put options. 
A) Buying call options on copper. 
B) Selling copper futures. 
C) Buying copper futures. 
D) Selling copper put options.

Question 10

The activities of speculators are necessary in the futures markets in order to:

Accepted Answer

A) prevent hedgers from trading options. 
B) provide a continual stream of profit to hedgers. 
C) maintain futures prices at appropriate levels. 
D) understand the direction of future price changes. 
A) prevent hedgers from trading options. 
B) provide a continual stream of profit to hedgers. 
C) maintain futures prices at appropriate levels. 
D) understand the direction of future price changes.

Question 11

The profit from a futures contract is the difference between the initial futures price and the spot price at expiration.

Accepted Answer

A) True 
 B)False

Question 12

The process of marking a futures contract to market means that:

Accepted Answer

A) the profitability of the contract is locked in from the onset of the contract. 
B) the amount of commodity to be delivered changes as prices change. 
C) contracts are closed out as soon as they become unprofitable. 
D) profits or losses are posted to the contract daily. 
A) the profitability of the contract is locked in from the onset of the contract. 
B) the amount of commodity to be delivered changes as prices change. 
C) contracts are closed out as soon as they become unprofitable. 
D) profits or losses are posted to the contract daily.

Question 13

Those who invest in derivative instruments with the purpose of increasing rather than decreasing risk are known as:

Accepted Answer

A) Option traders. 
B) Futures traders. 
C) Hedgers. 
D) Speculators. 
A) Option traders. 
B) Futures traders. 
C) Hedgers. 
D) Speculators.

Question 14

Forward contracts are marked to market.

Accepted Answer

A) True 
 B)False

Question 15

By using options, a firm can protect against increase in raw material prices, while continuing to benefit from price decreases.

Accepted Answer

A) True 
 B)False

Question 16

What has happened to cause a $250 loss to be marked to the margin account of a futures contract buyer?

Accepted Answer

A) The commodity decreased in value on that day. 
B) The commodity increased in value on that day. 
C) The commodity decreased in value by $250 over the contract's life. 
D) The commodity increased in value by $250 over the contract's life. 
A) The commodity decreased in value on that day. 
B) The commodity increased in value on that day. 
C) The commodity decreased in value by $250 over the contract's life. 
D) The commodity increased in value by $250 over the contract's life.

Question 17

Engaging itself in a swap contract, a firm might agree to make a series of regular payments in one currency in return for receiving a series of payments in another currency.

Accepted Answer

A) True 
 B)False

Question 18

The seller of a pork bellies futures contract at $.41 per pound noted that the closing price of pork bellies was $0.44 today.What will happen to this contract, which requires delivery of 40,000 of pork bellies at expiration?

Accepted Answer

A) A loss of $400 is posted to the account 
B) A gain of $400 is posted to the account 
C) A loss of $1,200 is posted to the account 
D) A gain of $1,200 is posted to the account 
A) A loss of $400 is posted to the account 
B) A gain of $400 is posted to the account 
C) A loss of $1,200 is posted to the account 
D) A gain of $1,200 is posted to the account

Question 19

What must happen to prices over the course of a contract for the seller of a futures contract to maximize benefits of the hedge?

Accepted Answer

A) Prices must decrease. 
B) Prices must increase. 
C) Prices must remain constant. 
D) The seller will profit on the hedge regardless of the direction of price movements. 
A) Prices must decrease. 
B) Prices must increase. 
C) Prices must remain constant. 
D) The seller will profit on the hedge regardless of the direction of price movements.

Question 20

When two borrowers engage in a currency swap, they agree to:

Accepted Answer

A) trade one currency for another, thus avoiding the foreign exchange market. 
B) make payments on each other's borrowings in a different currency. 
C) pay to each other any depreciation or appreciation of the currency. 
D) exchange fixed-rate interest payments for variable-rate interest payments. 
A) trade one currency for another, thus avoiding the foreign exchange market. 
B) make payments on each other's borrowings in a different currency. 
C) pay to each other any depreciation or appreciation of the currency. 
D) exchange fixed-rate interest payments for variable-rate interest payments.

Exam 26: Risk Management

Financial futures are available to protect against all of the following except:

Why do companies hedge to reduce risk?

Discuss the statement, "the better the risk management policies of a company, the greater a company's debt capacity".

Discuss similarities and differences between futures contracts and forward contracts.

Interest rate swaps allow both counterparties to:

Company A can borrow at a fixed rate of 9.5% and variable rate of Prime plus 1%.Company A prefers a fixed rate.Company B can borrow at 8% fixed rate and Prime plus 2%.Company B prefers a variable rate.Determine whether an interest rate swap will be beneficial to both parties..

One distinguishing difference between the buyer of a futures contract and the buyer of an option contract is that the futures buyer:

A gasoline distributor buys a gasoline futures contract that requires acceptance of 42,000 gallons of gasoline at $0.94 per gallon.How is the account marked to market if gasoline futures close the next day at $0.97?

A copper producer is worried about the copper prices going down.The risk of downward movement in prices can be hedged by taking one of the following positions.

The activities of speculators are necessary in the futures markets in order to:

The profit from a futures contract is the difference between the initial futures price and the spot price at expiration.

The process of marking a futures contract to market means that:

Those who invest in derivative instruments with the purpose of increasing rather than decreasing risk are known as:

Forward contracts are marked to market.

By using options, a firm can protect against increase in raw material prices, while continuing to benefit from price decreases.

What has happened to cause a $250 loss to be marked to the margin account of a futures contract buyer?

Engaging itself in a swap contract, a firm might agree to make a series of regular payments in one currency in return for receiving a series of payments in another currency.

The seller of a pork bellies futures contract at $.41 per pound noted that the closing price of pork bellies was $0.44 today.What will happen to this contract, which requires delivery of 40,000 of pork bellies at expiration?

What must happen to prices over the course of a contract for the seller of a futures contract to maximize benefits of the hedge?

When two borrowers engage in a currency swap, they agree to:

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, Ipos, and Seasoned Offerings

Debt Policy

Leasing

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Credit Management and Collection

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

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