Question 1

Futures contracts are standardized to expire at one time each year.

Accepted Answer

A) True 
 B)False

Question 2

Nestlé wishes to obtain a loan denominated in Swiss francs but considers the U.S.market to offer better terms.How can Nestlé accomplish this?

Accepted Answer

A)  Borrow francs in Switzerland, exchange for dollars and arrange a currency swap 
B)  Borrow francs in Switzerland, exchange for dollars and arrange an interest-rate swap 
C)  Borrow dollars in U.S., exchange for francs and arrange an interest-rate swap 
D)  Borrow dollars in U.S., exchange for francs and arrange a currency swap 
A)  Borrow francs in Switzerland, exchange for dollars and arrange a currency swap 
B)  Borrow francs in Switzerland, exchange for dollars and arrange an interest-rate swap 
C)  Borrow dollars in U.S., exchange for francs and arrange an interest-rate swap 
D)  Borrow dollars in U.S., exchange for francs and arrange a currency swap

Question 3

When two borrowers engage in a currency swap,they agree to:

Accepted Answer

A)  trade one currency for another, thus avoiding the foreign exchange market. 
B)  make payments on each other's borrowings in a different currency. 
C)  pay to each other any depreciation or appreciation of the currency. 
D)  exchange fixed-rate interest payments for variable-rate interest payments. 
A)  trade one currency for another, thus avoiding the foreign exchange market. 
B)  make payments on each other's borrowings in a different currency. 
C)  pay to each other any depreciation or appreciation of the currency. 
D)  exchange fixed-rate interest payments for variable-rate interest payments.

Question 4

Both the seller and the buyer in a futures contract are required to put up margins.

Accepted Answer

A) True 
 B)False

Question 5

Counterparties to an interest rate swap exchange both interest payments and principal amounts.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following is not correct concerning the financial futures markets?

Accepted Answer

A)  One of the prominent exchanges for financial futures is the Chicago Board of Trade. 
B)  The contracts were first traded in 1972. 
C)  A major use is protection from interest-rate risk. 
D)  Trading in commodity futures significantly exceeds trading in financial futures. 
A)  One of the prominent exchanges for financial futures is the Chicago Board of Trade. 
B)  The contracts were first traded in 1972. 
C)  A major use is protection from interest-rate risk. 
D)  Trading in commodity futures significantly exceeds trading in financial futures.

Question 7

Managers are willing to pay a price to hedge because:

Accepted Answer

A)  they receive increased profits in return. 
B)  the returns on derivative instruments are not taxed. 
C)  they value the reduction in uncertainty. 
D)  it permits the managers to receive higher cash bonuses. 
A)  they receive increased profits in return. 
B)  the returns on derivative instruments are not taxed. 
C)  they value the reduction in uncertainty. 
D)  it permits the managers to receive higher cash bonuses.

Question 8

What must happen to prices over the course of a contract for the seller of a futures contract to maximize benefits of the hedge?

Accepted Answer

A)  Prices must decrease. 
B)  Prices must increase. 
C)  Prices must remain constant. 
D)  The seller will profit on the hedge regardless of the direction of price movements. 
A)  Prices must decrease. 
B)  Prices must increase. 
C)  Prices must remain constant. 
D)  The seller will profit on the hedge regardless of the direction of price movements.

Question 9

The purpose of a margin account for a futures contract is to:

Accepted Answer

A)  guarantee a minimum margin of profit for the contract holder. 
B)  allow futures traders to have more than one contract at once. 
C)  provide a cushion for the exchange against defaults on the contract. 
D)  hold interest payments until expiration. 
A)  guarantee a minimum margin of profit for the contract holder. 
B)  allow futures traders to have more than one contract at once. 
C)  provide a cushion for the exchange against defaults on the contract. 
D)  hold interest payments until expiration.

Question 10

Which of the following is not correct concerning futures contracts?

Accepted Answer

A)  Entails an obligation rather than an option. 
B)  Contract price is set at the beginning of the contract. 
C)  Contracts are exchange-traded. 
D)  Gains or losses are recorded at contract expiration. 
A)  Entails an obligation rather than an option. 
B)  Contract price is set at the beginning of the contract. 
C)  Contracts are exchange-traded. 
D)  Gains or losses are recorded at contract expiration.

Question 11

A cotton producer has purchased cotton futures that involve 50,000 pounds of cotton at a price of $0.60 per pound.By contract expiration the producer finds that cotton prices have declined by $0.07 per pound.As a result of the futures contracts,the producer will:

Accepted Answer

A)  lose $3,500 per contract in the futures market which offsets gains in the cash market. 
B)  gain $3,500 per contract in the futures market which offsets losses in the cash market. 
C)  lose $3,500 per contract in the futures market and suffer an opportunity cost in the cash market. 
D)  gain $3,500 per contract in the futures market and gain $0.10 per pound in the cash market. 
A)  lose $3,500 per contract in the futures market which offsets gains in the cash market. 
B)  gain $3,500 per contract in the futures market which offsets losses in the cash market. 
C)  lose $3,500 per contract in the futures market and suffer an opportunity cost in the cash market. 
D)  gain $3,500 per contract in the futures market and gain $0.10 per pound in the cash market.

Question 12

Under what conditions can the use of options actually be detrimental to the firm's profitability?

Accepted Answer

In the case of buying option contracts,e

Question 13

Interest rate swaps allow both counterparties to:

Accepted Answer

A)  reduce interest expenses. 
B)  avoid repayment of the notional principal. 
C)  rearrange the balance sheet. 
D)  pay a floating rate of interest on their debt. 
A)  reduce interest expenses. 
B)  avoid repayment of the notional principal. 
C)  rearrange the balance sheet. 
D)  pay a floating rate of interest on their debt.

Question 14

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 $2.80 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 15

How can companies use swaps to change the risk of securities they have issued?

Accepted Answer

Swaps allow firms to exchange one series

Question 16

The basic difference between speculators and hedgers in futures contracts is that speculators:

Accepted Answer

A)  will profit regardless of the direction of price change. 
B)  are not protecting their commodity holdings through an offsetting transaction. 
C)  are concerned only with long-term price movements. 
D)  take a position in more than one commodity at a time. 
A)  will profit regardless of the direction of price change. 
B)  are not protecting their commodity holdings through an offsetting transaction. 
C)  are concerned only with long-term price movements. 
D)  take a position in more than one commodity at a time.

Question 17

Which of the following is not generally considered a benefit of hedging?

Accepted Answer

A)  It reduces one or more aspects of business risk. 
B)  It allows prices to be locked in advance. 
C)  The costs of hedging are paid by the speculators. 
D)  It can stabilize profits. 
A)  It reduces one or more aspects of business risk. 
B)  It allows prices to be locked in advance. 
C)  The costs of hedging are paid by the speculators. 
D)  It can stabilize profits.

Question 18

How might a firm such as General Mills use options to control raw material prices for breakfast cereals?

Accepted Answer

A)  Buy call options on commodities. 
B)  Sell call options on commodities. 
C)  Buy put options on commodities. 
D)  Sell put options on commodities. 
A)  Buy call options on commodities. 
B)  Sell call options on commodities. 
C)  Buy put options on commodities. 
D)  Sell put options on commodities.

Question 19

If the market for corn futures has more prospective sellers than buyers,then one would expect:

Accepted Answer

A)  the price of corn futures to decrease. 
B)  the price of corn futures to increase. 
C)  some traders to change from seller to buyer. 
D)  the market to cease operations until demand is rebalanced. 
A)  the price of corn futures to decrease. 
B)  the price of corn futures to increase. 
C)  some traders to change from seller to buyer. 
D)  the market to cease operations until demand is rebalanced.

Question 20

At the expiration of a futures contract,the futures price will be:

Accepted Answer

A)  greater than spot price. 
B)  equal to the spot price. 
C)  less than the spot price. 
D)  more than the forward price. 
A)  greater than spot price. 
B)  equal to the spot price. 
C)  less than the spot price. 
D)  more than the forward price.

Exam 26: Risk Management

Futures contracts are standardized to expire at one time each year.

Nestlé wishes to obtain a loan denominated in Swiss francs but considers the U.S.market to offer better terms.How can Nestlé accomplish this?

When two borrowers engage in a currency swap,they agree to:

Both the seller and the buyer in a futures contract are required to put up margins.

Counterparties to an interest rate swap exchange both interest payments and principal amounts.

Which of the following is not correct concerning the financial futures markets?

Managers are willing to pay a price to hedge because:

What must happen to prices over the course of a contract for the seller of a futures contract to maximize benefits of the hedge?

The purpose of a margin account for a futures contract is to:

Which of the following is not correct concerning futures contracts?

A cotton producer has purchased cotton futures that involve 50,000 pounds of cotton at a price of $0.60 per pound.By contract expiration the producer finds that cotton prices have declined by $0.07 per pound.As a result of the futures contracts,the producer will:

Under what conditions can the use of options actually be detrimental to the firm's profitability?

Interest rate swaps allow both counterparties to:

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 $2.80 per bushel.The hedger has:

How can companies use swaps to change the risk of securities they have issued?

The basic difference between speculators and hedgers in futures contracts is that speculators:

Which of the following is not generally considered a benefit of hedging?

How might a firm such as General Mills use options to control raw material prices for breakfast cereals?

If the market for corn futures has more prospective sellers than buyers,then one would expect:

At the expiration of a futures contract,the futures price will be:

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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