Question 1

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 delivery of the commodity underlying the contract or reverse its position by making an offsetting transaction. Rarely do contract buyers take delivery. It is much more common for them to reverse their positions just prior to expiration of the contract by selling an identical contract. By buying and then selling an identical contract, the clearinghouse recognizes these transactions as offsetting each other.

Question 2

A long hedge requires ____ a futures contract

Accepted Answer

A)  the creation of 
B)  the selling of 
C)  the buying of 
D)  margining 
A)  the creation of 
B)  the selling of 
C)  the buying of 
D)  margining C

Question 3

Which of the following is a motive for using insurance to manage risk?

Accepted Answer

A)  Premiums, no matter how high, are consistent and easy to budget. 
B)  The firm intends to make money from the insurance company if a specified loss happens. 
C)  The firm does not want to be concerned with small, inconsequential losses and chooses to have the insurance company handle them. 
D)  Insurance can provide protection against events that can cause financial distress. 
A)  Premiums, no matter how high, are consistent and easy to budget. 
B)  The firm intends to make money from the insurance company if a specified loss happens. 
C)  The firm does not want to be concerned with small, inconsequential losses and chooses to have the insurance company handle them. 
D)  Insurance can provide protection against events that can cause financial distress. A

Question 4

Firms work to diversify. All of the following are diversification methods that firms use EXCEPT:

Accepted Answer

A)  Firms seek to expand the customer base. 
B)  Firms seek to obtain raw materials from a number of suppliers. 
C)  Firms seek to isolate their product by selling to a single niche market. 
D)  Firms seek to produce more than one product. 
A)  Firms seek to expand the customer base. 
B)  Firms seek to obtain raw materials from a number of suppliers. 
C)  Firms seek to isolate their product by selling to a single niche market. 
D)  Firms seek to produce more than one product.

Question 5

A short hedge requires the ____ a futures contract.

Accepted Answer

A)  margining 
B)  creating 
C)  buying of 
D)  selling of 
A)  margining 
B)  creating 
C)  buying of 
D)  selling of

Question 6

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 7

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 8

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)  I only 
B)  II only 
C)  Both I and II 
D)  Neither I nor II 
A)  I only 
B)  II only 
C)  Both I and II 
D)  Neither I nor II

Question 9

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 10

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 11

List several reasons why a firm may choose to employ risk management techniques.

Accepted Answer

1. Reduce the chance for financial distr

Question 12

Which of the following statements about risk management strategies is/are correct?
I. It reduces the variability of a firm's expected cash flows.
II. It reduces the chance of catastrophic financial distress.

Accepted Answer

A)  I only 
B)  II only 
C)  Both I and II 
D)  Neither I nor II 
A)  I only 
B)  II only 
C)  Both I and II 
D)  Neither I nor II

Question 13

To offset the lack of marketing information which could result in corporate risk, a firm can do which of the following?

Accepted Answer

A)  Manufacture the product overseas. 
B)  Develop more raw material suppliers. 
C)  Test-market a product. 
D)  Change advertising. 
A)  Manufacture the product overseas. 
B)  Develop more raw material suppliers. 
C)  Test-market a product. 
D)  Change advertising.

Question 14

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 15

Which of the following is a loss that companies would self-insure?

Accepted Answer

A)  Product breakage 
B)  Fraud 
C)  Unexpected business interruptions 
D)  Officer liability 
A)  Product breakage 
B)  Fraud 
C)  Unexpected business interruptions 
D)  Officer liability

Question 16

What is a hedge?

Accepted Answer

A hedge is a transaction that limits the

Question 17

Which of the following statements about diversification is/are correct?
I. Diversification may be able to reduce the risk of a portfolio to less than the weighted average risk of the assets.
II.Diversification is always prudent and should be expanded to include new, unrelated products whenever possible.

Accepted Answer

A)  I only 
B)  II only 
C)  Both I and II 
D)  Neither I nor II 
A)  I only 
B)  II only 
C)  Both I and II 
D)  Neither I nor II

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)  I only 
B)  II only 
C)  Both I and II 
D)  Neither I nor II 
A)  I only 
B)  II only 
C)  Both I and II 
D)  Neither I nor II

Question 19

All of the following are losses generally insured by corporations EXCEPT:

Accepted Answer

A)  Death of key employees 
B)  Executive bonuses 
C)  Fraud 
D)  Product liability 
A)  Death of key employees 
B)  Executive bonuses 
C)  Fraud 
D)  Product liability

Question 20

All of the following are reasons to reduce financial distress EXCEPT:

Accepted Answer

A)  enhanced debt capacity. 
B)  reduced WACC. 
C)  better currency exchange ratio. 
D)  ensure adequate cash flows. 
A)  enhanced debt capacity. 
B)  reduced WACC. 
C)  better currency exchange ratio. 
D)  ensure adequate cash flows.

Exam 21: Risk Management

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

A long hedge requires ____ a futures contract

Which of the following is a motive for using insurance to manage risk?

Firms work to diversify. All of the following are diversification methods that firms use EXCEPT:

A short hedge requires the ____ a futures contract.

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

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

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.

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

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

List several reasons why a firm may choose to employ risk management techniques.

Which of the following statements about risk management strategies is/are correct? I. It reduces the variability of a firm's expected cash flows. II. It reduces the chance of catastrophic financial distress.

To offset the lack of marketing information which could result in corporate risk, a firm can do which of the following?

The most important reason to hedge business risk is to:

Which of the following is a loss that companies would self-insure?

What is a hedge?

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.

All of the following are losses generally insured by corporations EXCEPT:

All of the following are reasons to reduce financial distress EXCEPT:

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

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

Capital Budgeting and Risk

The Cost of Capital

Capital Structure Concepts

Capital Structure Management in Practice

Dividend Policy

Working Capital Policy and Short-term Financing

The Management of Cash and Marketable Securities

Management of Accounts Receivable and Inventories

Lease and Intermediate-term Financing

Financing With Derivatives

International Financial Management

Corporate Restructuring

Continuous Compounding and Discounting

Mutually Exclusive Investments Having Unequal Lives

Breakeven Analysis

Bond Refunding Analysis

Taxes

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