Question 1

Because most hedging acts to reduce risk, managers should expect that hedging will:

Accepted Answer

A) increase profits. 
B) decrease profits. 
C) increase the firm's stock price. 
D) stabilize the firm's dividend payout. 
A) increase profits. 
B) decrease profits. 
C) increase the firm's stock price. 
D) stabilize the firm's dividend payout.

Question 2

The swap is the arrangement by two counterparties to exchange one stream of cash flow for another.

Accepted Answer

A) True 
 B)False

Question 3

In an interest rate swap, borrowers typically exchange fixed-rate payments in one currency for:

Accepted Answer

A) fixed-rate payments in another currency. 
B) variable-rate payments in another currency. 
C) fixed-rate payments in the same currency. 
D) variable-rate payments in the same currency. 
A) fixed-rate payments in another currency. 
B) variable-rate payments in another currency. 
C) fixed-rate payments in the same currency. 
D) variable-rate payments in the same currency.

Question 4

A hedger buys a futures contract that obligates the owner to take delivery of 5,000 bushels of wheat at a price of $3.30 per bushel.At expiration the spot price of wheat is $3.80 per bushel.The hedger has:

Accepted Answer

A) saved 50¢ per bushel through hedging. 
B) gained peace of mind at a price of 50¢ per bushel. 
C) the opportunity to avoid taking delivery, since price declined. 
D) locked in an effective price of $3.05 per bushel. 
A) saved 50¢ per bushel through hedging. 
B) gained peace of mind at a price of 50¢ per bushel. 
C) the opportunity to avoid taking delivery, since price declined. 
D) locked in an effective price of $3.05 per bushel.

Question 5

Which of the following statements is correct?

Accepted Answer

A) An option seller makes more profits than an option buyer. 
B) A futures seller makes more profits than a futures buyer. 
C) A futures buyer's profit will be equal to the futures seller's loss. 
D) Both futures buyer and seller make profit. 
A) An option seller makes more profits than an option buyer. 
B) A futures seller makes more profits than a futures buyer. 
C) A futures buyer's profit will be equal to the futures seller's loss. 
D) Both futures buyer and seller make profit.

Question 6

Speculators are a necessary component of well-functioning futures markets.

Accepted Answer

A) True 
 B)False

Question 7

The typical sequence of cash flows in a futures contract is:

Accepted Answer

A) purchase price plus a margin account up front, differences are settled at expiration. 
B) margin account up front, differences are posted daily and settled in cash if margin drops too low. 
C) margin account up front, all differences settled at expiration. 
D) all funds are paid at expiration of the contract. 
A) purchase price plus a margin account up front, differences are settled at expiration. 
B) margin account up front, differences are posted daily and settled in cash if margin drops too low. 
C) margin account up front, all differences settled at expiration. 
D) all funds are paid at expiration of the contract.

Question 8

The primary purpose of financial futures is to:

Accepted Answer

A) benefit from increases in interest rates. 
B) protect against swings in interest rates or prices of financial assets. 
C) translate one currency into another. 
D) guarantee the repayment of loan principal. 
A) benefit from increases in interest rates. 
B) protect against swings in interest rates or prices of financial assets. 
C) translate one currency into another. 
D) guarantee the repayment of loan principal.

Question 9

Explain whether the following is a fair comment."The farmer does not avoid risk by selling grain futures.If grain prices stay above a certain rate, then the farmer will actually have lost money by selling grain at a specified price.

Accepted Answer

The object of hedging is to eliminate ri

Question 10

A hedger who buys a futures contract is betting that prices will _____ at the expiration of the contract.

Accepted Answer

A) Decrease 
B) Increase 
C) Remain constant 
D) Guarantee high profits 
A) Decrease 
B) Increase 
C) Remain constant 
D) Guarantee high profits

Question 11

In general, when deciding whether a market participant needs to buy or sell futures contracts in order to hedge, the rule could be:

Accepted Answer

A) buy futures if you have the underlying asset and sell futures if you need the underlying asset. 
B) sell futures if you have the underlying asset and buy futures if you need the underlying asset. 
C) buy futures if you want to speculate, sell futures if you want to hedge. 
D) buy futures if you are willing to have unlimited risk, sell futures if you want capped risk. 
A) buy futures if you have the underlying asset and sell futures if you need the underlying asset. 
B) sell futures if you have the underlying asset and buy futures if you need the underlying asset. 
C) buy futures if you want to speculate, sell futures if you want to hedge. 
D) buy futures if you are willing to have unlimited risk, sell futures if you want capped risk.

Question 12

The customary delivery procedure at the expiration of a commodity futures contract is:

Accepted Answer

A) delivering the commodity to the futures buyer. 
B) delivering the commodity to the futures exchange. 
C) offsetting the initial futures position and settling in cash. 
D) adding the profit or loss to your margin account and continuing to trade. 
A) delivering the commodity to the futures buyer. 
B) delivering the commodity to the futures exchange. 
C) offsetting the initial futures position and settling in cash. 
D) adding the profit or loss to your margin account and continuing to trade.

Question 13

What is the basic difference in strategy between buying and selling a futures contract?

Accepted Answer

Assuming that the buyer of a futures con

Question 14

A farmer hedged his risk by buying put options on wheat with an exercise price of $2.70 at a price of $0.14 per bushel.If the price of wheat at the expiration of the contract is $2.70, what is the net revenue from each bushel of wheat?

Accepted Answer

A) $2.56 
B) $2.63 
C) $2.70 
D) $2.84 
A) $2.56 
B) $2.63 
C) $2.70 
D) $2.84

Question 15

Which of the following is not correct concerning the financial futures markets?

Accepted Answer

A) One of the prominent exchanges for financial futures is the Chicago Board of Trade. 
B) The contracts were first traded in 1972. 
C) A major use is protection from interest-rate risk. 
D) Trading in commodity futures significantly exceeds trading in financial futures. 
A) One of the prominent exchanges for financial futures is the Chicago Board of Trade. 
B) The contracts were first traded in 1972. 
C) A major use is protection from interest-rate risk. 
D) Trading in commodity futures significantly exceeds trading in financial futures.

Question 16

What happens to the price of a futures contract as expiration draws closer?

Accepted Answer

A) It exceeds the spot price of the asset. 
B) It is exceeded by the spot price of the asset. 
C) It approaches the spot price of the asset. 
D) There is no relationship between futures price and spot price as the contract approaches expiration. 
A) It exceeds the spot price of the asset. 
B) It is exceeded by the spot price of the asset. 
C) It approaches the spot price of the asset. 
D) There is no relationship between futures price and spot price as the contract approaches expiration.

Question 17

Which of the following is not correct concerning futures contracts?

Accepted Answer

A) Entails an obligation rather than an option. 
B) Contract price is set at the beginning of the contract. 
C) Contracts are exchange-traded. 
D) Gains or losses are recorded at contract expiration. 
A) Entails an obligation rather than an option. 
B) Contract price is set at the beginning of the contract. 
C) Contracts are exchange-traded. 
D) Gains or losses are recorded at contract expiration.

Question 18

How can companies use swaps to change the risk of securities they have issued?

Accepted Answer

Swaps allow firms to exchange one series

Question 19

The basic difference between speculators and hedgers in futures contracts is that speculators:

Accepted Answer

A) will profit regardless of the direction of price change. 
B) are not protecting their commodity holdings through an offsetting transaction. 
C) are concerned only with long-term price movements. 
D) take a position in more than one commodity at a time. 
A) will profit regardless of the direction of price change. 
B) are not protecting their commodity holdings through an offsetting transaction. 
C) are concerned only with long-term price movements. 
D) take a position in more than one commodity at a time.

Question 20

A farmer can reduce the quantity risk by buying a futures contract.

Accepted Answer

A) True 
 B)False

Exam 26: Risk Management

Because most hedging acts to reduce risk, managers should expect that hedging will:

The swap is the arrangement by two counterparties to exchange one stream of cash flow for another.

In an interest rate swap, borrowers typically exchange fixed-rate payments in one currency for:

A hedger buys a futures contract that obligates the owner to take delivery of 5,000 bushels of wheat at a price of $3.30 per bushel.At expiration the spot price of wheat is $3.80 per bushel.The hedger has:

Which of the following statements is correct?

Speculators are a necessary component of well-functioning futures markets.

The typical sequence of cash flows in a futures contract is:

The primary purpose of financial futures is to:

Explain whether the following is a fair comment."The farmer does not avoid risk by selling grain futures.If grain prices stay above a certain rate, then the farmer will actually have lost money by selling grain at a specified price.

A hedger who buys a futures contract is betting that prices will _____ at the expiration of the contract.

In general, when deciding whether a market participant needs to buy or sell futures contracts in order to hedge, the rule could be:

The customary delivery procedure at the expiration of a commodity futures contract is:

What is the basic difference in strategy between buying and selling a futures contract?

A farmer hedged his risk by buying put options on wheat with an exercise price of $2.70 at a price of $0.14 per bushel.If the price of wheat at the expiration of the contract is $2.70, what is the net revenue from each bushel of wheat?

Which of the following is not correct concerning the financial futures markets?

What happens to the price of a futures contract as expiration draws closer?

Which of the following is not correct concerning futures contracts?

How can companies use swaps to change the risk of securities they have issued?

The basic difference between speculators and hedgers in futures contracts is that speculators:

A farmer can reduce the quantity risk by buying a futures contract.

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

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