Question 1

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 2

A "clearinghouse" operated by the futures exchange handles:

Accepted Answer

A)  the offices of the future contract buyers. 
B)  the location of the future contract sellers. 
C)  the payments between buyers and sellers. 
D)  the actual products bought and sold. 
A)  the offices of the future contract buyers. 
B)  the location of the future contract sellers. 
C)  the payments between buyers and sellers. 
D)  the actual products bought and sold.

Question 3

When a lack of information can result in business risk, management can do all of the following to acquire additional information EXCEPT:

Accepted Answer

A)  Refer to the annual reports of competitors for needed information. 
B)  Purchase information from those that possess the knowledge needed. 
C)  Form a panel to evaluate the product 
D)  Test market a product 
A)  Refer to the annual reports of competitors for needed information. 
B)  Purchase information from those that possess the knowledge needed. 
C)  Form a panel to evaluate the product 
D)  Test market a product

Question 4

Marking to market is a procedure for _____________ contracts.

Accepted Answer

A)  futures 
B)  forwards 
C)  margin 
D)  implied 
A)  futures 
B)  forwards 
C)  margin 
D)  implied

Question 5

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)  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 6

All of the following are derivative securities EXCEPT:

Accepted Answer

A)  Forwards 
B)  Margins 
C)  Futures 
D)  Options 
A)  Forwards 
B)  Margins 
C)  Futures 
D)  Options

Question 7

A risk that shareholder wealth-maximizing managers should seek to offset in the firm that they are managing is:

Accepted Answer

A)  dividend payout risk 
B)  exchange rate risk 
C)  research and development risk 
D)  leasing risk 
A)  dividend payout risk 
B)  exchange rate risk 
C)  research and development risk 
D)  leasing risk

Question 8

An example of hedging in order to control risk would be:

Accepted Answer

A)  Car makers reducing the number of models that will be manufactured this year. 
B)  Toy stores placing orders in December for toys needed by Christmas. 
C)  Airline companies attempting to lock in the price paid for fuel. 
D)  Fashion designers offering showings of their new clothing line in several major cities. 
A)  Car makers reducing the number of models that will be manufactured this year. 
B)  Toy stores placing orders in December for toys needed by Christmas. 
C)  Airline companies attempting to lock in the price paid for fuel. 
D)  Fashion designers offering showings of their new clothing line in several major cities.

Question 9

All of the following are non-hedging strategies that can be used to manage business risk EXCEPT:

Accepted Answer

A)  acquisition of additional information 
B)  forward contracts 
C)  diversification 
D)  insurance 
A)  acquisition of additional information 
B)  forward contracts 
C)  diversification 
D)  insurance

Question 10

Which of the following is the most important reason for firms to use risk management techniques?

Accepted Answer

A)  To make supernormal profits 
B)  To reduce the chance of catastrophic financial distress 
C)  To reduce management's liability 
D)  To control inventory losses 
A)  To make supernormal profits 
B)  To reduce the chance of catastrophic financial distress 
C)  To reduce management's liability 
D)  To control inventory losses

Question 11

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

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 12

How does hedging reduce or eliminate business risks?

Accepted Answer

When a company hedges a transaction, it

Question 13

Some reasons to manage risk by hedging are which of the following?
I. Ability to have needed cash flows.
II. Reduce the chance of financial loss

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 14

Which of the following is a related benefit of hedging external risks for a company?

Accepted Answer

A)  Management can determine international markets for their product. 
B)  Management can forecast political events that may impact their sales. 
C)  Management can focus on performance and compensation factors that are under their control. 
D)  Management can determine the economic forces that will impact their earnings. 
A)  Management can determine international markets for their product. 
B)  Management can forecast political events that may impact their sales. 
C)  Management can focus on performance and compensation factors that are under their control. 
D)  Management can determine the economic forces that will impact their earnings.

Question 15

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 16

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 17

Which of the following is the current price in a futures contract?

Accepted Answer

A)  volatile price 
B)  spot price 
C)  short price 
D)  long price 
A)  volatile price 
B)  spot price 
C)  short price 
D)  long price

Question 18

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.

Question 19

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 20

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

Exam 21: Risk Management

A futures contract is a(n) ________________contract.

A "clearinghouse" operated by the futures exchange handles:

When a lack of information can result in business risk, management can do all of the following to acquire additional information EXCEPT:

Marking to market is a procedure for _____________ contracts.

All of the following are derivative securities EXCEPT:

A risk that shareholder wealth-maximizing managers should seek to offset in the firm that they are managing is:

An example of hedging in order to control risk would be:

All of the following are non-hedging strategies that can be used to manage business risk EXCEPT:

Which of the following is the most important reason for firms to use risk management techniques?

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

How does hedging reduce or eliminate business risks?

Some reasons to manage risk by hedging are which of the following? I. Ability to have needed cash flows. II. Reduce the chance of financial loss

Which of the following is a related benefit of hedging external risks for a company?

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

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

Which of the following is the current price in a futures contract?

Which of the following is a firm-specific asset?

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

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

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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