Question 1

Because most hedging acts to reduce risk,managers should expect that hedging will:

Accepted Answer

A)  increase profits. 
B)  decrease profits. 
C)  increase the firm's stock price. 
D)  stabilize the firm's dividend payout. 
A)  increase profits. 
B)  decrease profits. 
C)  increase the firm's stock price. 
D)  stabilize the firm's dividend payout. B

Question 2

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

Accepted Answer

A) True 
 B)False  True

Question 3

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. A

Question 4

A copper producer is worried about the copper prices going down.The risk of downward movement in prices can be hedged by taking one of the following positions.

Accepted Answer

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

Question 5

Speculators are a necessary component of well-functioning futures markets.

Accepted Answer

A) True 
 B)False

Question 6

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

Accepted Answer

A) True 
 B)False

Question 7

In general,when deciding whether a market participant needs to buy or sell futures contracts in order to hedge,the rule could be:

Accepted Answer

A)  buy futures if you have the underlying asset and sell futures if you need the underlying asset. 
B)  sell futures if you have the underlying asset and buy futures if you need the underlying asset. 
C)  buy futures if you want to speculate, sell futures if you want to hedge. 
D)  buy futures if you are willing to have unlimited risk, sell futures if you want capped risk. 
A)  buy futures if you have the underlying asset and sell futures if you need the underlying asset. 
B)  sell futures if you have the underlying asset and buy futures if you need the underlying asset. 
C)  buy futures if you want to speculate, sell futures if you want to hedge. 
D)  buy futures if you are willing to have unlimited risk, sell futures if you want capped risk.

Question 8

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 9

Which of the following is not correct concerning forward contracts? Forward contracts:

Accepted Answer

A)  are not standardized. 
B)  do not set the price until the end of the contract. 
C)  are not traded on organized exchanges. 
D)  are not marked to market daily. 
A)  are not standardized. 
B)  do not set the price until the end of the contract. 
C)  are not traded on organized exchanges. 
D)  are not marked to market daily.

Question 10

Which of the following is the major difference between forward and futures contracts?

Accepted Answer

A)  Futures contracts are more expensive than forward contracts. 
B)  Forward contracts are available only for foreign currencies. 
C)  Futures contracts are always delivered. 
D)  Forward contracts are not marked to market. 
A)  Futures contracts are more expensive than forward contracts. 
B)  Forward contracts are available only for foreign currencies. 
C)  Futures contracts are always delivered. 
D)  Forward contracts are not marked to market.

Question 11

Why do companies hedge to reduce risk?

Accepted Answer

Fluctuations in commodity prices,interes

Question 12

The seller of a pork bellies futures contract at $.41 per pound noted that the closing price of pork bellies was $0.44 today.What will happen to this contract,which requires delivery of 40,000 of pork bellies at expiration?

Accepted Answer

A)  A loss of $400 is posted to the account 
B)  A gain of $400 is posted to the account 
C)  A loss of $1,200 is posted to the account 
D)  A gain of $1,200 is posted to the account 
A)  A loss of $400 is posted to the account 
B)  A gain of $400 is posted to the account 
C)  A loss of $1,200 is posted to the account 
D)  A gain of $1,200 is posted to the account

Question 13

A producer that is worried about the future price that will be available when the product is to be sold can hedge this price risk by:

Accepted Answer

A)  buying a futures contract. 
B)  selling a futures contract. 
C)  buying a put option. 
D)  selling a call option. 
A)  buying a futures contract. 
B)  selling a futures contract. 
C)  buying a put option. 
D)  selling a call option.

Question 14

Those who invest in derivative instruments with the purpose of increasing rather than decreasing risk are known as:

Accepted Answer

A)  Option traders. 
B)  Futures traders. 
C)  Hedgers. 
D)  Speculators. 
A)  Option traders. 
B)  Futures traders. 
C)  Hedgers. 
D)  Speculators.

Question 15

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 16

Why do corporations spend billions on insurance worldwide? Should corporations insure against all risk or does insurance make sense for some risks than others?

Accepted Answer

Insurance is a part of risk management t

Question 17

Discuss what it means for a futures contract to be "marked to market." If you provide an example,assume that the hedger has purchased a 5,000-bushel wheat contract at a price of $3.90 per bushel.

Accepted Answer

The process of marking to market records

Question 18

List the advantages and disadvantages of holding futures rather than the underlying commodity.

Accepted Answer

One advantage of holding futures is the

Question 19

In an interest rate swap,borrowers typically exchange fixed-rate payments in one currency for:

Accepted Answer

A)  fixed-rate payments in another currency. 
B)  variable-rate payments in another currency. 
C)  fixed-rate payments in the same currency. 
D)  variable-rate payments in the same currency. 
A)  fixed-rate payments in another currency. 
B)  variable-rate payments in another currency. 
C)  fixed-rate payments in the same currency. 
D)  variable-rate payments in the same currency.

Question 20

The derivatives market is characterized by:

Accepted Answer

A)  stability. 
B)  innovation. 
C)  riskiness. 
D)  private deals. 
A)  stability. 
B)  innovation. 
C)  riskiness. 
D)  private deals.

Exam 26: Risk Management

Because most hedging acts to reduce risk,managers should expect that hedging will:

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

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

A copper producer is worried about the copper prices going down.The risk of downward movement in prices can be hedged by taking one of the following positions.

Speculators are a necessary component of well-functioning futures markets.

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

In general,when deciding whether a market participant needs to buy or sell futures contracts in order to hedge,the rule could be:

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

Which of the following is not correct concerning forward contracts? Forward contracts:

Which of the following is the major difference between forward and futures contracts?

Why do companies hedge to reduce risk?

The seller of a pork bellies futures contract at $.41 per pound noted that the closing price of pork bellies was $0.44 today.What will happen to this contract,which requires delivery of 40,000 of pork bellies at expiration?

A producer that is worried about the future price that will be available when the product is to be sold can hedge this price risk by:

Those who invest in derivative instruments with the purpose of increasing rather than decreasing risk are known as:

Currency swaps are used to:

Why do corporations spend billions on insurance worldwide? Should corporations insure against all risk or does insurance make sense for some risks than others?

Discuss what it means for a futures contract to be "marked to market." If you provide an example,assume that the hedger has purchased a 5,000-bushel wheat contract at a price of $3.90 per bushel.

List the advantages and disadvantages of holding futures rather than the underlying commodity.

In an interest rate swap,borrowers typically exchange fixed-rate payments in one currency for:

The derivatives market is characterized by:

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 and Payout 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

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