Question 1

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 2

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 3

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

Accepted Answer

One advantage of holding futures is the

Question 4

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 5

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 6

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 7

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 8

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 9

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 10

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 11

Why do companies hedge to reduce risk?

Accepted Answer

Fluctuations in commodity prices, intere

Question 12

A gasoline distributor buys a gasoline futures contract that requires acceptance of 42,000 gallons of gasoline at $0.94 per gallon.How is the account marked to market if gasoline futures close the next day at $0.97?

Accepted Answer

A) A loss of $1,260 is posted to the account 
B) A gain of $1,260 is posted to the account 
C) A loss of $12,600 is posted to the account 
D) A gain of $12,600 is posted to the account 
A) A loss of $1,260 is posted to the account 
B) A gain of $1,260 is posted to the account 
C) A loss of $12,600 is posted to the account 
D) A gain of $12,600 is posted to the account

Question 13

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 14

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

Question 15

116.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 16

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 17

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 18

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 19

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 20

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

Exam 26: What We Do and Do Not Know About Finance

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

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

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

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

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

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

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

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

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

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

Why do companies hedge to reduce risk?

A gasoline distributor buys a gasoline futures contract that requires acceptance of 42,000 gallons of gasoline at $0.94 per gallon.How is the account marked to market if gasoline futures close the next day at $0.97?

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

The derivatives market is characterized by:

116.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 hedge the risk of downward movement in the price of the produce by taking one of the following positions.

Which of the following is not correct concerning futures contracts?

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:

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?

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

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 Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Conclusion

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