Question 1

A miller can hedge the price risk on wheat by taking one of the following positions.

Accepted Answer

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

Question 2

Use the ordering of chicken wings to explain a forward contract.

Accepted Answer

Your order specifies the wings type (mil

Question 3

The customary delivery procedure at the expiration of a commodity futures contract is:

Accepted Answer

A)  delivering the commodity to the futures buyer. 
B)  delivering the commodity to the futures exchange. 
C)  offsetting the initial futures position and settling in cash. 
D)  adding the profit or loss to your margin account and continuing to trade. 
A)  delivering the commodity to the futures buyer. 
B)  delivering the commodity to the futures exchange. 
C)  offsetting the initial futures position and settling in cash. 
D)  adding the profit or loss to your margin account and continuing to trade.

Question 4

Which of the following statements is correct?

Accepted Answer

A)  An option seller makes more profits than an option buyer. 
B)  A futures seller makes more profits than a futures buyer. 
C)  A futures buyer's profit will be equal to the futures seller's loss. 
D)  Both futures buyer and seller make profit. 
A)  An option seller makes more profits than an option buyer. 
B)  A futures seller makes more profits than a futures buyer. 
C)  A futures buyer's profit will be equal to the futures seller's loss. 
D)  Both futures buyer and seller make profit.

Question 5

Engaging itself in a swap contract,a firm might agree to make a series of regular payments in one currency in return for receiving a series of payments in another currency.

Accepted Answer

A) True 
 B)False

Question 6

The seller of a copper futures contract noticed that her account was marked with a $500 gain yesterday.If the standardized contract requires delivery of 25,000 pounds of copper,what happened that day to the price of copper?

Accepted Answer

A)  The price closed down $0.02 per pound. 
B)  The price closed up $0.02 per pound. 
C)  The price closed down $0.20 per pound. 
D)  The price closed up $0.20 per pound. 
A)  The price closed down $0.02 per pound. 
B)  The price closed up $0.02 per pound. 
C)  The price closed down $0.20 per pound. 
D)  The price closed up $0.20 per pound.

Question 7

You enter into a forward contract to take delivery of one million Deutsche marks three months from now.What happens to the price you will pay at expiration if marks depreciate during the contract?

Accepted Answer

A)  Your price will increase 
B)  Your price will decrease 
C)  Your price was fixed at the onset of the contract 
D)  Your price was fixed, and you will receive correspondingly more marks due to the depreciation 
A)  Your price will increase 
B)  Your price will decrease 
C)  Your price was fixed at the onset of the contract 
D)  Your price was fixed, and you will receive correspondingly more marks due to the depreciation

Question 8

All financial futures contracts are written on a deliverable asset.

Accepted Answer

A) True 
 B)False

Question 9

An oil producer would sell,rather than buy,crude oil futures for protection from falling prices.

Accepted Answer

A) True 
 B)False

Question 10

Hershey's Chocolate is concerned about cocoa prices prior to building inventory for Halloween sales.Analysts project that price per ton could vary from $1,250 to $1,500.A September call option can be purchased with a $1,300 strike price for a premium of $145.What is Hershey's worst-case scenario if it purchases these options?

Accepted Answer

A)  Cocoa prices will rise to $1,500 and Hershey is only protected to a price of $1,300. 
B)  Cocoa prices will decline to $1,250 and Hershey must pay an extra $50 per ton. 
C)  Cocoa prices will not rise above Hershey's break-even price of $1,445, which equals the sum of the strike price plus the option premium. 
D)  Cocoa Prices will remain below $1,300 and Hershey will lose $145 per option contract. 
A)  Cocoa prices will rise to $1,500 and Hershey is only protected to a price of $1,300. 
B)  Cocoa prices will decline to $1,250 and Hershey must pay an extra $50 per ton. 
C)  Cocoa prices will not rise above Hershey's break-even price of $1,445, which equals the sum of the strike price plus the option premium. 
D)  Cocoa Prices will remain below $1,300 and Hershey will lose $145 per option contract.

Question 11

Explain whether the following is a fair comment."The farmer does not avoid risk by selling grain futures.If grain prices stay above a certain rate,then the farmer will actually have lost money by selling grain at a specified price.

Accepted Answer

The object of hedging is to eliminate ri

Question 12

A farmer can reduce the quantity risk by buying a futures contract.

Accepted Answer

A) True 
 B)False

Question 13

A hedger who buys a futures contract is betting that prices will _____ at the expiration of the contract.

Accepted Answer

A)  Decrease 
B)  Increase 
C)  Remain constant 
D)  Guarantee high profits 
A)  Decrease 
B)  Increase 
C)  Remain constant 
D)  Guarantee high profits

Question 14

If managers are rational,they will only hedge when they perceive that:

Accepted Answer

A)  prices are headed in an adverse direction. 
B)  derivative instruments are priced lower than actual value. 
C)  risk reduction is preferable to higher potential profits. 
D)  they can increase their profitability by doing so. 
A)  prices are headed in an adverse direction. 
B)  derivative instruments are priced lower than actual value. 
C)  risk reduction is preferable to higher potential profits. 
D)  they can increase their profitability by doing so.

Question 15

Which of the following futures contract holders is speculating?

Accepted Answer

A)  A wheat farmer who sells wheat futures. 
B)  A cattle rancher who buys live cattle futures. 
C)  A candy maker who buys sugar futures. 
D)  An oil producer who sells crude oil futures. 
A)  A wheat farmer who sells wheat futures. 
B)  A cattle rancher who buys live cattle futures. 
C)  A candy maker who buys sugar futures. 
D)  An oil producer who sells crude oil futures.

Question 16

One distinguishing difference between the buyer of a futures contract and the buyer of an option contract is that the futures buyer:

Accepted Answer

A)  pays a much higher premium than option buyers. 
B)  has an obligation to purchase, not a choice. 
C)  can lose no more than the initial premium. 
D)  has increased rather than reduced risk. 
A)  pays a much higher premium than option buyers. 
B)  has an obligation to purchase, not a choice. 
C)  can lose no more than the initial premium. 
D)  has increased rather than reduced risk.

Question 17

What has happened to cause a $250 loss to be marked to the margin account of a futures contract buyer?

Accepted Answer

A)  The commodity decreased in value on that day. 
B)  The commodity increased in value on that day. 
C)  The commodity decreased in value by $250 over the contract's life. 
D)  The commodity increased in value by $250 over the contract's life. 
A)  The commodity decreased in value on that day. 
B)  The commodity increased in value on that day. 
C)  The commodity decreased in value by $250 over the contract's life. 
D)  The commodity increased in value by $250 over the contract's life.

Exam 26: Risk Management

A miller can hedge the price risk on wheat by taking one of the following positions.

Use the ordering of chicken wings to explain a forward contract.

The customary delivery procedure at the expiration of a commodity futures contract is:

Which of the following statements is correct?

Engaging itself in a swap contract,a firm might agree to make a series of regular payments in one currency in return for receiving a series of payments in another currency.

The seller of a copper futures contract noticed that her account was marked with a $500 gain yesterday.If the standardized contract requires delivery of 25,000 pounds of copper,what happened that day to the price of copper?

You enter into a forward contract to take delivery of one million Deutsche marks three months from now.What happens to the price you will pay at expiration if marks depreciate during the contract?

All financial futures contracts are written on a deliverable asset.

An oil producer would sell,rather than buy,crude oil futures for protection from falling prices.

Explain whether the following is a fair comment."The farmer does not avoid risk by selling grain futures.If grain prices stay above a certain rate,then the farmer will actually have lost money by selling grain at a specified price.

A farmer can reduce the quantity risk by buying a futures contract.

A hedger who buys a futures contract is betting that prices will _____ at the expiration of the contract.

If managers are rational,they will only hedge when they perceive that:

Which of the following futures contract holders is speculating?

One distinguishing difference between the buyer of a futures contract and the buyer of an option contract is that the futures buyer:

What has happened to cause a $250 loss to be marked to the margin account of a futures contract buyer?

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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