Question 1

Which of the following characteristics is similar in both futures and forward contracts?

Accepted Answer

A)  Future asset transactions are conducted at an agreed price. 
B)  Contracts are sold through organized exchanges. 
C)  Contract terms are standardized. 
D)  Price changes are settled daily. 
A)  Future asset transactions are conducted at an agreed price. 
B)  Contracts are sold through organized exchanges. 
C)  Contract terms are standardized. 
D)  Price changes are settled daily.

Question 2

General Mills bought September call options for wheat with an exercise price of $2.80 at a price of $0.10 per bushel.If the price of wheat at the expiration is $2.90,what is the cost of one bushel of wheat for General Mills?

Accepted Answer

A)  $2.70 
B)  $2.80 
C)  $2.90 
D)  $3.00 
A)  $2.70 
B)  $2.80 
C)  $2.90 
D)  $3.00

Question 3

The spot price of silver closes at $7 per ounce at the expiration of an option contract.Which one of the following option positions will have value?

Accepted Answer

A)  The buyer of a call with $5 strike price. 
B)  The seller of a call with $5 strike price. 
C)  The buyer of a put with $5 strike price. 
D)  None of the choices. 
A)  The buyer of a call with $5 strike price. 
B)  The seller of a call with $5 strike price. 
C)  The buyer of a put with $5 strike price. 
D)  None of the choices.

Question 4

Producers who hedge through the purchase of put options must remember that they may be:

Accepted Answer

A)  reducing their profits compared to not hedging. 
B)  obligated to sell their product at a lower than market price. 
C)  increasing their overall risk. 
D)  facing unlimited price risk. 
A)  reducing their profits compared to not hedging. 
B)  obligated to sell their product at a lower than market price. 
C)  increasing their overall risk. 
D)  facing unlimited price risk.

Question 5

Which of the following is a source of profit for a swap dealer?

Accepted Answer

A)  Commission charged on the sale of bonds. 
B)  Bid-ask spread. 
C)  Margin account. 
D)  Option premium. 
A)  Commission charged on the sale of bonds. 
B)  Bid-ask spread. 
C)  Margin account. 
D)  Option premium.

Question 6

There is perhaps a negative connotation about the term "speculators." Discuss the essential purpose that they serve in providing the ability to hedge.

Accepted Answer

Although the futures exchange conducts a

Question 7

The most common use of hedging in finance is to reduce,rather than increase,risk.

Accepted Answer

A) True 
 B)False

Question 8

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 9

Discuss similarities and differences between futures contracts and forward contracts.

Accepted Answer

Both futures and forwards set an obligat

Question 10

The primary purpose of financial futures is to:

Accepted Answer

A)  benefit from increases in interest rates. 
B)  protect against swings in interest rates or prices of financial assets. 
C)  translate one currency into another. 
D)  guarantee the repayment of loan principal. 
A)  benefit from increases in interest rates. 
B)  protect against swings in interest rates or prices of financial assets. 
C)  translate one currency into another. 
D)  guarantee the repayment of loan principal.

Question 11

All options are standardized,exchange-traded financial instruments.

Accepted Answer

A) True 
 B)False

Question 12

Discuss the statement,"managers are not paid to avoid risk".

Accepted Answer

Many investors are willing to accept ris

Question 13

What is the basic difference between hedgers and speculators?

Accepted Answer

The difference between hedging and specu

Question 14

By using options,a firm can protect against increase in raw material prices,while continuing to benefit from price decreases.

Accepted Answer

A) True 
 B)False

Question 15

Forward contracts are marked to market.

Accepted Answer

A) True 
 B)False

Question 16

Discuss the statement,"the better the risk management policies of a company,the greater a company's debt capacity".

Accepted Answer

It is true that successful risk manageme

Question 17

The process of marking a futures contract to market means that:

Accepted Answer

A)  the profitability of the contract is locked in from the onset of the contract. 
B)  the amount of commodity to be delivered changes as prices change. 
C)  contracts are closed out as soon as they become unprofitable. 
D)  profits or losses are posted to the contract daily. 
A)  the profitability of the contract is locked in from the onset of the contract. 
B)  the amount of commodity to be delivered changes as prices change. 
C)  contracts are closed out as soon as they become unprofitable. 
D)  profits or losses are posted to the contract daily.

Question 18

Manufacturers who are concerned about volatile commodity prices often use option contracts to alter their risks.What is the worst-case scenario for a seller of put options on corn with a strike price of $2.25 per bushel?

Accepted Answer

A)  If corn prices drop below $2.25 the option premium will be lost. 
B)  If corn prices rise above $2.25 the option premium will be lost. 
C)  Losses can be unlimited if prices drop sufficiently. 
D)  Losses can be unlimited if prices rise sufficiently. 
A)  If corn prices drop below $2.25 the option premium will be lost. 
B)  If corn prices rise above $2.25 the option premium will be lost. 
C)  Losses can be unlimited if prices drop sufficiently. 
D)  Losses can be unlimited if prices rise sufficiently.

Question 19

Hedging reduces risk,but it is seldom cost free.

Accepted Answer

A) True 
 B)False

Question 20

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

Exam 26: Risk Management

Which of the following characteristics is similar in both futures and forward contracts?

General Mills bought September call options for wheat with an exercise price of $2.80 at a price of $0.10 per bushel.If the price of wheat at the expiration is $2.90,what is the cost of one bushel of wheat for General Mills?

The spot price of silver closes at $7 per ounce at the expiration of an option contract.Which one of the following option positions will have value?

Producers who hedge through the purchase of put options must remember that they may be:

Which of the following is a source of profit for a swap dealer?

There is perhaps a negative connotation about the term "speculators." Discuss the essential purpose that they serve in providing the ability to hedge.

The most common use of hedging in finance is to reduce,rather than increase,risk.

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

Discuss similarities and differences between futures contracts and forward contracts.

The primary purpose of financial futures is to:

All options are standardized,exchange-traded financial instruments.

Discuss the statement,"managers are not paid to avoid risk".

What is the basic difference between hedgers and speculators?

By using options,a firm can protect against increase in raw material prices,while continuing to benefit from price decreases.

Forward contracts are marked to market.

Discuss the statement,"the better the risk management policies of a company,the greater a company's debt capacity".

The process of marking a futures contract to market means that:

Manufacturers who are concerned about volatile commodity prices often use option contracts to alter their risks.What is the worst-case scenario for a seller of put options on corn with a strike price of $2.25 per bushel?

Hedging reduces risk,but it is seldom cost free.

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

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

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