Question 1

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 2

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 3

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 4

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

Accepted Answer

Swaps allow firms to exchange one series

Question 5

A copper producer is worried about the copper prices going down.The risk of downward movement in prices can be hedged by taking one of the following positions.

Accepted Answer

A) Buying call options on copper 
B) Selling copper futures 
C) Buying copper futures 
D) Selling copper call options 
A) Buying call options on copper 
B) Selling copper futures 
C) Buying copper futures 
D) Selling copper call options

Question 6

Discuss what it means for a futures contract to be "marked to market." If you provide an example, assume that the hedger has purchased a 5,000-bushel wheat contract at a price of $3.90 per bushel.

Accepted Answer

The process of marking to market records

Question 7

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 8

Forward contracts are marked to market.

Accepted Answer

A) True 
 B)False

Question 9

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 10

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

Accepted Answer

Many investors are willing to accept ris

Question 11

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 12

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 13

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

Question 14

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 15

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," show the farmer's financial results of hedging.

Accepted Answer

Two contracts sold represent an obligati

Question 16

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 17

The effect of marking a futures contract to market is similar to:

Accepted Answer

A) Requiring daily payments from the contract buyer 
B) Requiring daily payments from the contract seller 
C) Closing the current position and opening a new position daily 
D) Imposing a daily fee on both buyers and sellers 
A) Requiring daily payments from the contract buyer 
B) Requiring daily payments from the contract seller 
C) Closing the current position and opening a new position daily 
D) Imposing a daily fee on both buyers and sellers

Question 18

118.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 19

Which of the following futures contract is written on a non-deliverable asset?

Accepted Answer

A) U.S.Treasury bills 
B) Wheat 
C) Standard & Poor's index 
D) British pounds 
A) U.S.Treasury bills 
B) Wheat 
C) Standard & Poor's index 
D) British pounds

Question 20

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

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

Interest rate swaps allow both counterparties to:

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

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

A copper producer is worried about the copper prices going down.The risk of downward movement in prices can be hedged by taking one of the following positions.

Discuss what it means for a futures contract to be "marked to market." If you provide an example, assume that the hedger has purchased a 5,000-bushel wheat contract at a price of $3.90 per bushel.

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:

Forward contracts are marked to market.

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:

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

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

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

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

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?

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

The effect of marking a futures contract to market is similar to:

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

Which of the following futures contract is written on a non-deliverable asset?

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

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

Filters