Question 1

The profit from a futures contract is the difference between the initial futures price and the spot price at expiration.

Accepted Answer

A) True 
 B)False

Question 2

Financial futures contracts are available only through the Chicago Board of Trade.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements is correct for an interest rate swap?

Accepted Answer

A)  There is an exchange on principal between counterparties. 
B)  There is no exchange of principal between counterparties. 
C)  There is an exchange of currencies between counterparties. 
D)  There is no exchange of cash between counterparties. 
A)  There is an exchange on principal between counterparties. 
B)  There is no exchange of principal between counterparties. 
C)  There is an exchange of currencies between counterparties. 
D)  There is no exchange of cash between counterparties.

Question 4

Which of the following would not be regulated in a standardized futures contract?

Accepted Answer

A)  Quantity of asset to be traded. 
B)  Quality of asset to be traded. 
C)  The spot price. 
D)  Date of settlement. 
A)  Quantity of asset to be traded. 
B)  Quality of asset to be traded. 
C)  The spot price. 
D)  Date of settlement.

Question 5

A farmer can hedge the risk of downward movement in the price of the produce by taking one of the following positions.

Accepted Answer

A)  Buying a call option. 
B)  Selling a put option. 
C)  Buying a put option. 
D)  Buying a futures contract. 
A)  Buying a call option. 
B)  Selling a put option. 
C)  Buying a put option. 
D)  Buying a futures contract.

Question 6

A futures contract seller is obligated to deliver 5,000 bushels of soybeans for $5.00 per bushel at expiration.If soybean futures close at $5.10 the next day,the seller:

Accepted Answer

A)  has a profit of $500 thus far on the contract. 
B)  has a loss of $500 thus far on the contract. 
C)  has no profit or loss, but is still obligated to deliver 5,000 bushels at $5.00. 
D)  will receive a cheque for $500 from the buyer of the contract. 
A)  has a profit of $500 thus far on the contract. 
B)  has a loss of $500 thus far on the contract. 
C)  has no profit or loss, but is still obligated to deliver 5,000 bushels at $5.00. 
D)  will receive a cheque for $500 from the buyer of the contract.

Question 7

Exchange traded futures contracts allow the seller to choose the place of delivery for the commodity.

Accepted Answer

A) True 
 B)False

Question 8

Why might an individual or organization be willing to swap fixed-rate loans for floating-rate loans?

Accepted Answer

A)  They may perceive that interest rates are ready to increase 
B)  Their cash flows may vary directly with interest rates 
C)  Floating rates are lower than fixed rates 
D)  They may be able to postpone the payment of principal 
A)  They may perceive that interest rates are ready to increase 
B)  Their cash flows may vary directly with interest rates 
C)  Floating rates are lower than fixed rates 
D)  They may be able to postpone the payment of principal

Question 9

Which of the following is a major reason for firms to engage in currency swaps?

Accepted Answer

A)  They will only be required to repay the interest. 
B)  They can obtain more favourable borrowing terms in a different currency. 
C)  The debt will not show on their balance sheets. 
D)  Borrowing in a foreign currency offers lucrative tax breaks. 
A)  They will only be required to repay the interest. 
B)  They can obtain more favourable borrowing terms in a different currency. 
C)  The debt will not show on their balance sheets. 
D)  Borrowing in a foreign currency offers lucrative tax breaks.

Question 10

As time draws closer to contract expiration,futures contract prices can be expected to:

Accepted Answer

A)  increase as the demand for delivery intensifies. 
B)  decrease as speculators resolve the uncertainty of prices. 
C)  move similarly to broad-based market indices, such as the S&P 500. 
D)  converge upon the spot price. 
A)  increase as the demand for delivery intensifies. 
B)  decrease as speculators resolve the uncertainty of prices. 
C)  move similarly to broad-based market indices, such as the S&P 500. 
D)  converge upon the spot price.

Question 11

Forward contracts are equivalent to tailor-made futures contracts.

Accepted Answer

A) True 
 B)False

Question 12

A hedger buys a futures contract that obligates the owner to take delivery of 5,000 bushels of wheat at a price of $3.30 per bushel.At expiration the spot price of wheat is $3.80 per bushel.The hedger has:

Accepted Answer

A)  saved 50¢ per bushel through hedging. 
B)  gained peace of mind at a price of 50¢ per bushel. 
C)  the opportunity to avoid taking delivery, since price declined. 
D)  locked in an effective price of $3.05 per bushel. 
A)  saved 50¢ per bushel through hedging. 
B)  gained peace of mind at a price of 50¢ per bushel. 
C)  the opportunity to avoid taking delivery, since price declined. 
D)  locked in an effective price of $3.05 per bushel.

Question 13

Provide a brief explanation of a currency and interest rate swap.

Accepted Answer

A currency swap is an agreement to excha

Question 14

Financial futures are available to protect against all of the following except:

Accepted Answer

A)  Interest-rate risk. 
B)  Level of equity prices. 
C)  Currency swap risk. 
D)  Exchange-rate risk. 
A)  Interest-rate risk. 
B)  Level of equity prices. 
C)  Currency swap risk. 
D)  Exchange-rate risk.

Question 15

What do you think are the advantages of holding futures rather than the underlying commodity? What do you think are the disadvantages?

Accepted Answer

One advantage of holding futures is the

Question 16

A farmer stores his fall harvest of corn and sells corn futures for March delivery at $2.50 per bushel.In March the spot price of corn is $2.20 per bushel.Which of the following is correct?

Accepted Answer

A)  The farmer is obligated to deliver corn to the futures buyer at $2.20. 
B)  The farmer has locked in an effective price of $2.50 per bushel. 
C)  The farmer would have been better off without the futures contact. 
D)  The farmer will receive $4.70 per bushel, which more than doubles the profit obtained without futures. 
A)  The farmer is obligated to deliver corn to the futures buyer at $2.20. 
B)  The farmer has locked in an effective price of $2.50 per bushel. 
C)  The farmer would have been better off without the futures contact. 
D)  The farmer will receive $4.70 per bushel, which more than doubles the profit obtained without futures.

Question 17

Put options can be thought of as insurance policies for commodity producers.

Accepted Answer

A) True 
 B)False

Question 18

Why are most futures contracts not settled through delivery of the product?

Accepted Answer

A)  Most contracts are settled through the margin account. 
B)  Most contracts expire with neither party having an obligation to the other party. 
C)  Most participants cancel their futures contracts through purchase of an option contract. 
D)  It is easier and cheaper to settle in cash or by offset. 
A)  Most contracts are settled through the margin account. 
B)  Most contracts expire with neither party having an obligation to the other party. 
C)  Most participants cancel their futures contracts through purchase of an option contract. 
D)  It is easier and cheaper to settle in cash or by offset.

Question 19

A soybean farmer anticipates the harvest of 10,000 bushels but is concerned about the spot price that may exist at that time.He therefore sells two futures contracts (5,000 bu.each,@ $5.75 per bu.).Unfortunately,the farmer was overly pessimistic,and the spot price at contract expiration is $6.00 per bushel.Ignoring the premium paid,and making the simplifying assumption that the contract was only held for one "day," shows the farmer's financial results of hedging.

Accepted Answer

Two contracts sold represent an obligati

Question 20

A soybean oil contract calls for delivery of 60,000 pounds.What happens to the seller of a soybean futures contract at 16 cents per pound if the futures price closes the next day at 18 cents per pound?

Accepted Answer

A)  The contract is marked to market with a $1,200 loss. 
B)  The contract is marked to market with a $1,200 gain. 
C)  Futures contracts are voided if price increases before expiration. 
D)  Nothing happens until the expiration of the contract. 
A)  The contract is marked to market with a $1,200 loss. 
B)  The contract is marked to market with a $1,200 gain. 
C)  Futures contracts are voided if price increases before expiration. 
D)  Nothing happens until the expiration of the contract.

Exam 26: Risk Management

The profit from a futures contract is the difference between the initial futures price and the spot price at expiration.

Financial futures contracts are available only through the Chicago Board of Trade.

Which of the following statements is correct for an interest rate swap?

Which of the following would not be regulated in a standardized futures contract?

A farmer can hedge the risk of downward movement in the price of the produce by taking one of the following positions.

A futures contract seller is obligated to deliver 5,000 bushels of soybeans for $5.00 per bushel at expiration.If soybean futures close at $5.10 the next day,the seller:

Exchange traded futures contracts allow the seller to choose the place of delivery for the commodity.

Why might an individual or organization be willing to swap fixed-rate loans for floating-rate loans?

Which of the following is a major reason for firms to engage in currency swaps?

As time draws closer to contract expiration,futures contract prices can be expected to:

Forward contracts are equivalent to tailor-made futures contracts.

A hedger buys a futures contract that obligates the owner to take delivery of 5,000 bushels of wheat at a price of $3.30 per bushel.At expiration the spot price of wheat is $3.80 per bushel.The hedger has:

Provide a brief explanation of a currency and interest rate swap.

Financial futures are available to protect against all of the following except:

What do you think are the advantages of holding futures rather than the underlying commodity? What do you think are the disadvantages?

A farmer stores his fall harvest of corn and sells corn futures for March delivery at $2.50 per bushel.In March the spot price of corn is $2.20 per bushel.Which of the following is correct?

Put options can be thought of as insurance policies for commodity producers.

Why are most futures contracts not settled through delivery of the product?

A soybean oil contract calls for delivery of 60,000 pounds.What happens to the seller of a soybean futures contract at 16 cents per pound if the futures price closes the next day at 18 cents per pound?

Goals and Governance of the Firm

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Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

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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

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