Question 1

All of the following are methods whereby a hedge is accomplished EXCEPT:

Accepted Answer

A) Using derivative securities 
B) Owning several shares of a company's stock 
C) Buying or selling a forward contract 
D) Using an option in the cash market 
A) Using derivative securities 
B) Owning several shares of a company's stock 
C) Buying or selling a forward contract 
D) Using an option in the cash market

Question 2

Which of the following is/are a company’s largest risk?
I.exchange rate risk
II.future raw material price risk

Accepted Answer

A) Only statement I is correct 
B) Only statement II is correct 
C) Both statements I and II are correct 
D) Neither statement I nor II is correct 
A) Only statement I is correct 
B) Only statement II is correct 
C) Both statements I and II are correct 
D) Neither statement I nor II is correct

Question 3

In the futures market, losers must pay winners each day.This is called:

Accepted Answer

A) paying up 
B) selling short 
C) taking a long position 
D) marking to market 
A) paying up 
B) selling short 
C) taking a long position 
D) marking to market

Question 4

Which of the following is a facilitator in all futures trades since all contracts are purchased from or sold by this entity?

Accepted Answer

A) The futures clearinghouse 
B) The futures trading floor 
C) The futures broker 
D) The futures exchange 
A) The futures clearinghouse 
B) The futures trading floor 
C) The futures broker 
D) The futures exchange

Question 5

What is marking-to-market and how is this process guaranteed?

Accepted Answer

Futures contracts require daily settleme

Question 6

What options does the buyer of a futures contract have at the time the futures contract matures?

Accepted Answer

The futures contract buyer can take deli

Question 7

The most important reason to hedge business risk is to:

Accepted Answer

A) reduce the chance of a business takeover. 
B) reduce employee theft. 
C) reduce management inaccuracies. 
D) reduce the chance of financial distress 
A) reduce the chance of a business takeover. 
B) reduce employee theft. 
C) reduce management inaccuracies. 
D) reduce the chance of financial distress

Question 8

Which of the following is generally used to enforce rights under patents and copyrights?

Accepted Answer

A) Legal action 
B) Takeover threats 
C) Diversification 
D) Retained earnings 
A) Legal action 
B) Takeover threats 
C) Diversification 
D) Retained earnings

Question 9

Which of the following statements about risk management strategies is/are correct?

Accepted Answer

A) Only statement I is correct 
B) Only statement II is correct 
C) Both statements I and II are correct 
D) Neither statement I nor II is correct 
A) Only statement I is correct 
B) Only statement II is correct 
C) Both statements I and II are correct 
D) Neither statement I nor II is correct

Question 10

Which of the following statements is/are correct about the reasons why hedging is difficult to do perfectly?
I.Available futures contract sizes may not match the hedging needs of the firm.
II.There may be a change in the relationship between the futures price and the local spot price.

Accepted Answer

A) Only statement I is correct 
B) Only statement II is correct 
C) Both statement I and II are correct 
D) Neither statement I nor II is correct 
A) Only statement I is correct 
B) Only statement II is correct 
C) Both statement I and II are correct 
D) Neither statement I nor II is correct

Question 11

Which of the following statements about hedging of business risks by investors is/are correct?
I.Operational information about companies is widely available and investors find it relatively simple to hedge business risk.
II.Investors have the necessary capital required to implement hedging strategies and do so consistently.

Accepted Answer

A) Only statement I is correct 
B) Only statement II is correct 
C) Both statement  I and II are correct 
D) Neither statement  I nor II is correct 
A) Only statement I is correct 
B) Only statement II is correct 
C) Both statement  I and II are correct 
D) Neither statement  I nor II is correct

Question 12

A firm can reduce risk by gaining control over the operating environment.Which of the following is an example?

Accepted Answer

A) Using general purpose assets. 
B) Hedging through a futures contract. 
C) Increasing the customer base. 
D) Using patents and copyrights. 
A) Using general purpose assets. 
B) Hedging through a futures contract. 
C) Increasing the customer base. 
D) Using patents and copyrights.

Question 13

Acquisition of additional information can be accomplished by all of the following EXCEPT:

Accepted Answer

A) Employing individuals or firms with the needed expertise 
B) Test-marketing 
C) Paying to have new issues of bonds "rated" 
D) Changing the location of the distributorship 
A) Employing individuals or firms with the needed expertise 
B) Test-marketing 
C) Paying to have new issues of bonds "rated" 
D) Changing the location of the distributorship

Question 14

How does hedging reduce or eliminate business risks?

Accepted Answer

When a company hedges a transaction, it

Question 15

What is a hedge?

Accepted Answer

A hedge is a transaction that limits the

Question 16

A futures contract is a(n) contract.

Accepted Answer

A) implied 
B) negotiated 
C) standardized 
D) variable 
A) implied 
B) negotiated 
C) standardized 
D) variable

Question 17

An example of hedging to control currency exchange rate risk is:

Accepted Answer

A) A wine distributor currently importing wine made from the 2010 vintage. 
B) A wine distributor paying for wine today that will be delivered in three years. 
C) A wine distributor that visits the vineyard where wine is made before buying the vintage. 
D) A wine distributor that settles all of its bills with euros. 
A) A wine distributor currently importing wine made from the 2010 vintage. 
B) A wine distributor paying for wine today that will be delivered in three years. 
C) A wine distributor that visits the vineyard where wine is made before buying the vintage. 
D) A wine distributor that settles all of its bills with euros.

Question 18

Which of the following statements is/are correct about a forward contract?
I.Forward contracts require a good faith deposit before an agreement can be reached.
II.Forward contracts are considered extremely risky since the price for the asset is determined when the contract matures.

Accepted Answer

A) Only statement I is correct 
B) Only statement II is correct 
C) Both statements I and II are correct 
D) Neither statement I nor II is correct 
A) Only statement I is correct 
B) Only statement II is correct 
C) Both statements I and II are correct 
D) Neither statement I nor II is correct

Question 19

Currency and commodity price volatility is a component of which of the following types of risk?

Accepted Answer

A) Systematic risk 
B) Unsystematic risk 
C) Operational risk 
D) Non-diversifiable risk 
A) Systematic risk 
B) Unsystematic risk 
C) Operational risk 
D) Non-diversifiable risk

Question 20

Which of the following is a firm-specific asset?

Accepted Answer

A) Sewing machines designed for the manufacture of summer and winter clothes. 
B) Fire-retardant paint in lime green. 
C) Auto plant that can produce six styles of vehicles. 
D) A manufacturing plant that makes spiral staircases, wood railings and stairway carpeting. 
A) Sewing machines designed for the manufacture of summer and winter clothes. 
B) Fire-retardant paint in lime green. 
C) Auto plant that can produce six styles of vehicles. 
D) A manufacturing plant that makes spiral staircases, wood railings and stairway carpeting.

Exam 21: Risk Management

All of the following are methods whereby a hedge is accomplished EXCEPT:

Which of the following is/are a company’s largest risk? I.exchange rate risk II.future raw material price risk

In the futures market, losers must pay winners each day.This is called:

Which of the following is a facilitator in all futures trades since all contracts are purchased from or sold by this entity?

What is marking-to-market and how is this process guaranteed?

What options does the buyer of a futures contract have at the time the futures contract matures?

The most important reason to hedge business risk is to:

Which of the following is generally used to enforce rights under patents and copyrights?

Which of the following statements about risk management strategies is/are correct?

Which of the following statements is/are correct about the reasons why hedging is difficult to do perfectly? I.Available futures contract sizes may not match the hedging needs of the firm. II.There may be a change in the relationship between the futures price and the local spot price.

A firm can reduce risk by gaining control over the operating environment.Which of the following is an example?

Acquisition of additional information can be accomplished by all of the following EXCEPT:

How does hedging reduce or eliminate business risks?

What is a hedge?

A futures contract is a(n) contract.

An example of hedging to control currency exchange rate risk is:

Which of the following statements is/are correct about a forward contract? I.Forward contracts require a good faith deposit before an agreement can be reached. II.Forward contracts are considered extremely risky since the price for the asset is determined when the contract matures.

Currency and commodity price volatility is a component of which of the following types of risk?

Which of the following is a firm-specific asset?

The Role and Objective of Financial Management

The Domestic and International Financial Marketplace

Evaluation of Financial Performance

Financial Planning and Forecasting

The Time Value of Money

A: The Time Value of Money

Fixed-Income Securities: Characteristics and Valuation

Common Stock: Characteristics, Valuation, and Issuance

Analysis of Risk and Return

Capital Budgeting and Cash Flow Analysis

Capital Budgeting: Decision Criteria and Real Option Considerations

A: Capital Budgeting: Decision Criteria and Real Option Considerations

Capital Budgeting and Risk

The Cost of Capital, Capital Structure, and Dividend Policy

Capital Structure Concepts

Capital Structure Management in Practice

A: Capital Structure Management in Practice

Dividend Policy

Working Capital Management

The Management of Cash and Marketable Securities

The Management of Accounts Receivable and Inventories

Lease and Intermediate-Term Financing

Financing with Derivatives

A: Financing with Derivatives

International Financial Management

Corporate Restructuring

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