Question 1

The purpose of a margin account for a futures contract is to:

Accepted Answer

A) guarantee a minimum margin of profit for the contract holder. 
B) allow futures traders to have more than one contract at once. 
C) provide a cushion for the exchange against defaults on the contract. 
D) hold interest payments until expiration. 
A) guarantee a minimum margin of profit for the contract holder. 
B) allow futures traders to have more than one contract at once. 
C) provide a cushion for the exchange against defaults on the contract. 
D) hold interest payments until expiration.

Question 2

Forward contracts are equivalent to tailor-made futures contracts.

Accepted Answer

A) True 
 B)False

Question 3

Futures contracts are standardized to expire at one time each year.

Accepted Answer

A) True 
 B)False

Question 4

Selling a futures contract may be appropriate for one who wishes to:

Accepted Answer

A) lock in a future sales price. 
B) lock in a future purchase price. 
C) speculate that future spot prices are going down. 
D) have a ready market in which to sell product. 
A) lock in a future sales price. 
B) lock in a future purchase price. 
C) speculate that future spot prices are going down. 
D) have a ready market in which to sell product.

Question 5

If managers are rational, they will only hedge when they perceive that:

Accepted Answer

A) prices are headed in an adverse direction. 
B) derivative instruments are priced lower than actual value. 
C) risk reduction is preferable to higher potential profits. 
D) they can increase their profitability by doing so. 
A) prices are headed in an adverse direction. 
B) derivative instruments are priced lower than actual value. 
C) risk reduction is preferable to higher potential profits. 
D) they can increase their profitability by doing so.

Question 6

All financial futures contracts are written on a deliverable asset.

Accepted Answer

A) True 
 B)False

Question 7

If the market for corn futures has more prospective sellers than buyers, then one would expect:

Accepted Answer

A) the price of corn futures to decrease. 
B) the price of corn futures to increase. 
C) some traders to change from seller to buyer. 
D) the market to cease operations until demand is rebalanced. 
A) the price of corn futures to decrease. 
B) the price of corn futures to increase. 
C) some traders to change from seller to buyer. 
D) the market to cease operations until demand is rebalanced.

Question 8

Which of the following is a major reason for firms to engage in currency swaps?

Accepted Answer

A) They will only be required to repay the interest. 
B) They can obtain more favourable borrowing terms in a different currency. 
C) The debt will not show on their balance sheets. 
D) Borrowing in a foreign currency offers lucrative tax breaks. 
A) They will only be required to repay the interest. 
B) They can obtain more favourable borrowing terms in a different currency. 
C) The debt will not show on their balance sheets. 
D) Borrowing in a foreign currency offers lucrative tax breaks.

Question 9

What is the basic difference between hedgers and speculators?

Accepted Answer

The difference between hedging and specu

Question 10

A futures contract seller is obligated to deliver 5,000 bushels of soybeans for $5.00 per bushel at expiration.If soybean futures close at $5.10 the next day, the seller:

Accepted Answer

A) has a profit of $500 thus far on the contract. 
B) has a loss of $500 thus far on the contract. 
C) has no profit or loss, but is still obligated to deliver 5,000 bushels at $5.00. 
D) will receive a cheque for $500 from the buyer of the contract. 
A) has a profit of $500 thus far on the contract. 
B) has a loss of $500 thus far on the contract. 
C) has no profit or loss, but is still obligated to deliver 5,000 bushels at $5.00. 
D) will receive a cheque for $500 from the buyer of the contract.

Question 11

Managers are willing to pay a price to hedge because:

Accepted Answer

A) they receive increased profits in return. 
B) the returns on derivative instruments are not taxed. 
C) they value the reduction in uncertainty. 
D) it permits the managers to receive higher cash bonuses. 
A) they receive increased profits in return. 
B) the returns on derivative instruments are not taxed. 
C) they value the reduction in uncertainty. 
D) it permits the managers to receive higher cash bonuses.

Question 12

What is an interest-rate swap, and what might motivate a borrower to arrange for one with a bank?

Accepted Answer

In a typical interest-rate swap, only th

Question 13

What is a currency swap and give an example of how this might be used?

Accepted Answer

A currency swap is an agreement to excha

Question 14

A forward market contract to buy Japanese yen three months in the future at a price of ¥105/$will:

Accepted Answer

A) insulate the buyer from changes in interest rates. 
B) protect the buyer from changes in exchange rates. 
C) lock in a profit based on current exchange rates. 
D) require delivery of the yen at the Chicago Board of Trade. 
A) insulate the buyer from changes in interest rates. 
B) protect the buyer from changes in exchange rates. 
C) lock in a profit based on current exchange rates. 
D) require delivery of the yen at the Chicago Board of Trade.

Question 15

A farmer who sells 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 16

Put options can be thought of as insurance policies for commodity producers.

Accepted Answer

A) True 
 B)False

Question 17

A miller can hedge the price risk on wheat by taking one of the following positions.

Accepted Answer

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

Question 18

A farmer stores his fall harvest of corn and sells corn futures for March delivery at $2.50 per bushel.In March the spot price of corn is $2.20 per bushel.Which of the following is correct?

Accepted Answer

A) The farmer is obligated to deliver corn to the futures buyer at $2.20. 
B) The farmer has locked in an effective price of $2.50 per bushel. 
C) The farmer would have been better off without the futures contact. 
D) The farmer will receive $4.70 per bushel, which more than doubles the profit obtained without futures. 
A) The farmer is obligated to deliver corn to the futures buyer at $2.20. 
B) The farmer has locked in an effective price of $2.50 per bushel. 
C) The farmer would have been better off without the futures contact. 
D) The farmer will receive $4.70 per bushel, which more than doubles the profit obtained without futures.

Question 19

An oil producer would sell, rather than buy, crude oil futures for protection from falling prices.

Accepted Answer

A) True 
 B)False

Question 20

Company X can borrow at 12% fixed and Prime plus 1.6%.Company Y can borrow at 10% fixed rate and Prime plus 1%.Determine whether an interest rate swap will be of benefit to both parties.

Accepted Answer

@#IMG-DLM& If the Quality Spread Differe

Exam 26: Risk Management

The purpose of a margin account for a futures contract is to:

Forward contracts are equivalent to tailor-made futures contracts.

Futures contracts are standardized to expire at one time each year.

Selling a futures contract may be appropriate for one who wishes to:

If managers are rational, they will only hedge when they perceive that:

All financial futures contracts are written on a deliverable asset.

If the market for corn futures has more prospective sellers than buyers, then one would expect:

Which of the following is a major reason for firms to engage in currency swaps?

What is the basic difference between hedgers and speculators?

A futures contract seller is obligated to deliver 5,000 bushels of soybeans for $5.00 per bushel at expiration.If soybean futures close at $5.10 the next day, the seller:

Managers are willing to pay a price to hedge because:

What is an interest-rate swap, and what might motivate a borrower to arrange for one with a bank?

What is a currency swap and give an example of how this might be used?

A forward market contract to buy Japanese yen three months in the future at a price of ¥105/$will:

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

Put options can be thought of as insurance policies for commodity producers.

A miller can hedge the price risk on wheat by taking one of the following positions.

A farmer stores his fall harvest of corn and sells corn futures for March delivery at $2.50 per bushel.In March the spot price of corn is $2.20 per bushel.Which of the following is correct?

An oil producer would sell, rather than buy, crude oil futures for protection from falling prices.

Company X can borrow at 12% fixed and Prime plus 1.6%.Company Y can borrow at 10% fixed rate and Prime plus 1%.Determine whether an interest rate swap will be of benefit to both parties.

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