Question 1

Regarding the profitability of options, it is impossible for a producer who sells put options to lose more than the price of the option premium.

Accepted Answer

A) True 
 B)False

Question 2

Counterparties to an interest rate swap exchange both interest payments and principal amounts.

Accepted Answer

A) True 
 B)False

Question 3

What do you think are the advantages of holding futures rather than the underlying commodity? What do you think are the disadvantages?

Accepted Answer

One advantage of holding futures is the

Question 4

At the expiration of a futures contract, the futures price will be:

Accepted Answer

A) greater than spot price. 
B) equal to the spot price. 
C) less than the spot price. 
D) more than the forward price. 
A) greater than spot price. 
B) equal to the spot price. 
C) less than the spot price. 
D) more than the forward price.

Question 5

Currency swaps are used to:

Accepted Answer

A) lock in an exchange rate for future delivery of a foreign currency. 
B) effectively transform loans originated in one currency to a different currency. 
C) transform fixed-rate loans into variable-rate loans. 
D) exchange foreign currencies in amounts not possible in the foreign exchange market. 
A) lock in an exchange rate for future delivery of a foreign currency. 
B) effectively transform loans originated in one currency to a different currency. 
C) transform fixed-rate loans into variable-rate loans. 
D) exchange foreign currencies in amounts not possible in the foreign exchange market.

Question 6

Which of the following is least responsible for the success of futures exchanges such as the Winnipeg Commodity Exchange?

Accepted Answer

A) Guaranteed settlement. 
B) Standardized contracts. 
C) Reduction of hedging costs through marking to market. 
D) Variety of settlement dates. 
A) Guaranteed settlement. 
B) Standardized contracts. 
C) Reduction of hedging costs through marking to market. 
D) Variety of settlement dates.

Question 7

Discuss the statement, "managers are not paid to avoid risk".

Accepted Answer

Many investors are willing to accept ris

Question 8

Unlike options, a futures contract binds the buyer to buy the commodity at a fixed price.

Accepted Answer

A) True 
 B)False

Question 9

You enter into a forward contract to take delivery of one million Deutsche marks three months from now.What happens to the price you will pay at expiration if marks depreciate during the contract?

Accepted Answer

A) Your price will increase 
B) Your price will decrease 
C) Your price was fixed at the onset of the contract 
D) Your price was fixed, and you will receive correspondingly more marks due to the depreciation 
A) Your price will increase 
B) Your price will decrease 
C) Your price was fixed at the onset of the contract 
D) Your price was fixed, and you will receive correspondingly more marks due to the depreciation

Question 10

A farmer can avoid delivery on a futures contract by buying an offsetting futures contract.

Accepted Answer

A) True 
 B)False

Question 11

Use the ordering of chicken wings to explain a forward contract.

Accepted Answer

Your order specifies the wings type (mil

Question 12

Why might an individual or organization be willing to swap fixed-rate loans for floating-rate loans?

Accepted Answer

A) They may perceive that interest rates are ready to increase 
B) Their cash flows may vary directly with interest rates 
C) Floating rates are lower than fixed rates 
D) They may be able to postpone the payment of principal 
A) They may perceive that interest rates are ready to increase 
B) Their cash flows may vary directly with interest rates 
C) Floating rates are lower than fixed rates 
D) They may be able to postpone the payment of principal

Question 13

Hedging reduces risk, but it is seldom cost free.

Accepted Answer

A) True 
 B)False

Question 14

Exchange traded futures contracts allow the seller to choose the place of delivery for the commodity.

Accepted Answer

A) True 
 B)False

Question 15

A firm can hedge the risk of upward movement in raw material prices by taking one of the following positions.

Accepted Answer

A) Buying a call option. 
B) Selling a call option. 
C) Buying a put option. 
D) Selling a futures contract. 
A) Buying a call option. 
B) Selling a call option. 
C) Buying a put option. 
D) Selling a futures contract.

Question 16

Financial futures contracts are available only through the Chicago Board of Trade.

Accepted Answer

A) True 
 B)False

Question 17

Provide a brief explanation of a currency and interest rate swap.

Accepted Answer

A currency swap is an agreement to excha

Question 18

Consolidated Bakeries needs to acquire 100,000 bushels of wheat each quarter.The spot price is $3.75 per bushel but is expected to increase.Consolidated can purchase call options on 5,000 bushels of wheat with a strike price of $3.80 per bushel and a premium of $.03 per bushel.Calculate total expected savings from purchasing the options if wheat is forecasted to sell at $3.90 per bushel in three months.Conversely, how much did it cost to hedge if the wheat price is unchanged in three months?

Accepted Answer

Consolidated will have an all-in cost of

Question 19

All options are standardized, exchange-traded financial instruments.

Accepted Answer

A) True 
 B)False

Question 20

General Mills bought September call options for wheat with an exercise price of $2.80 at a price of $0.10 per bushel.If the price of wheat at the expiration is $2.90, what is the cost of one bushel of wheat for General Mills?

Accepted Answer

A) $2.70 
B) $2.80 
C) $2.90 
D) $3.00 
A) $2.70 
B) $2.80 
C) $2.90 
D) $3.00

Exam 26: Risk Management

Regarding the profitability of options, it is impossible for a producer who sells put options to lose more than the price of the option premium.

Counterparties to an interest rate swap exchange both interest payments and principal amounts.

What do you think are the advantages of holding futures rather than the underlying commodity? What do you think are the disadvantages?

At the expiration of a futures contract, the futures price will be:

Currency swaps are used to:

Which of the following is least responsible for the success of futures exchanges such as the Winnipeg Commodity Exchange?

Discuss the statement, "managers are not paid to avoid risk".

Unlike options, a futures contract binds the buyer to buy the commodity at a fixed price.

You enter into a forward contract to take delivery of one million Deutsche marks three months from now.What happens to the price you will pay at expiration if marks depreciate during the contract?

A farmer can avoid delivery on a futures contract by buying an offsetting futures contract.

Use the ordering of chicken wings to explain a forward contract.

Why might an individual or organization be willing to swap fixed-rate loans for floating-rate loans?

Hedging reduces risk, but it is seldom cost free.

Exchange traded futures contracts allow the seller to choose the place of delivery for the commodity.

A firm can hedge the risk of upward movement in raw material prices by taking one of the following positions.

Financial futures contracts are available only through the Chicago Board of Trade.

Provide a brief explanation of a currency and interest rate swap.

All options are standardized, exchange-traded financial instruments.

General Mills bought September call options for wheat with an exercise price of $2.80 at a price of $0.10 per bushel.If the price of wheat at the expiration is $2.90, what is the cost of one bushel of wheat for General Mills?

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

Filters