Question 1

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 2

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 3

Those who invest in derivative instruments with the purpose of increasing rather than decreasing risk are known as:

Accepted Answer

A) Option traders 
B) Futures traders 
C) Hedgers 
D) Speculators 
A) Option traders 
B) Futures traders 
C) Hedgers 
D) Speculators

Question 4

What is the basic difference in strategy between buying and selling a futures contract?

Accepted Answer

Assuming that the buyer of a futures con

Question 5

How does a soybean farmer lock in a price of $5.40 per bushel when the cash price at harvest is only $4.90?

Accepted Answer

A) Profit in futures market to offset loss in cash market by selling futures contract at $5.40/bushel 
B) Break even in both markets by buying a futures contract at $5.40/bushel 
C) Profit in cash market to offset loss in futures market by buying futures contract at $5.40/bushel 
D) Break even in both markets by selling a futures contract at $5.40/bushel 
A) Profit in futures market to offset loss in cash market by selling futures contract at $5.40/bushel 
B) Break even in both markets by buying a futures contract at $5.40/bushel 
C) Profit in cash market to offset loss in futures market by buying futures contract at $5.40/bushel 
D) Break even in both markets by selling a futures contract at $5.40/bushel

Question 6

Discuss similarities and differences between futures contracts and forward contracts.

Accepted Answer

Both futures and forwards set an obligat

Question 7

What is an interest-rate swap, and what might motivate a borrower to arrange for one with a bank?

Accepted Answer

In a typical interest-rate swap, only th

Question 8

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 9

The spot price of silver closes at $7 per ounce at the expiration of an option contract.Which one of the following option positions will have value?

Accepted Answer

A) The buyer of a call with $5 strike price 
B) The seller of a call with $5 strike price 
C) The buyer of a put with $5 strike price 
D) The seller of a put with $5 strike price 
A) The buyer of a call with $5 strike price 
B) The seller of a call with $5 strike price 
C) The buyer of a put with $5 strike price 
D) The seller of a put with $5 strike price

Question 10

Hedging reduces risk, but it is seldom cost free.

Accepted Answer

A) True 
 B)False

Question 11

Your firm has just tendered for a contract in Japan.You won't know for 3 months whether you get the contract but if you do, you will receive a payment of 10 million yen a year from now on.You are worried that if the yen declines in value, the dollar value of this payment will be less than you expect and the project could even show a loss.Discuss the possible ways that you could protect the firm against a decline in the value of the yen.Illustrate the possible outcomes if you do get the contract and if you don't.

Accepted Answer

One way to protect the position is to se

Question 12

Producers who hedge through the purchase of put options must remember that they may be:

Accepted Answer

A) Reducing their profits compared to not hedging 
B) Obligated to sell their product at a lower than market price 
C) Increasing their overall risk 
D) Facing unlimited price risk 
A) Reducing their profits compared to not hedging 
B) Obligated to sell their product at a lower than market price 
C) Increasing their overall risk 
D) Facing unlimited price risk

Question 13

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 14

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,

Question 15

A producer that is worried about the future price that will be available when the product is to be sold can hedge this price risk by:

Accepted Answer

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

Question 16

Regarding the profitability of options, it is impossible for a producer who sells put options to lose more than the exercise price agreed in the option contract.

Accepted Answer

A) True 
 B)False

Question 17

There is perhaps a negative connotation about the term "speculators." Discuss the essential purpose that they serve in providing the ability to hedge.

Accepted Answer

Although the futures exchange conducts a

Question 18

Which of the following characteristics is similar in both futures and forward contracts?

Accepted Answer

A) Future asset transactions are conducted at an agreed price 
B) Contracts are sold through organized exchanges 
C) Contract terms are standardized 
D) Price changes are settled daily 
A) Future asset transactions are conducted at an agreed price 
B) Contracts are sold through organized exchanges 
C) Contract terms are standardized 
D) Price changes are settled daily

Question 19

Which of the following is least responsible for the success of futures exchanges such as the Winnipeg Commodity Exchange?

Accepted Answer

A) Guaranteed settlement 
B) Standardized contracts 
C) Reduction of hedging costs through marking to market 
D) Variety of settlement dates 
A) Guaranteed settlement 
B) Standardized contracts 
C) Reduction of hedging costs through marking to market 
D) Variety of settlement dates

Question 20

Selling a futures contract may be appropriate for one who wishes to:

Accepted Answer

A) Lock in a future sales price 
B) Lock in a future purchase price 
C) Speculate that future spot prices are going down 
D) Have a ready market in which to sell product 
A) Lock in a future sales price 
B) Lock in a future purchase price 
C) Speculate that future spot prices are going down 
D) Have a ready market in which to sell product

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

Which of the following futures contract holders is speculating?

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

Those who invest in derivative instruments with the purpose of increasing rather than decreasing risk are known as:

What is the basic difference in strategy between buying and selling a futures contract?

How does a soybean farmer lock in a price of $5.40 per bushel when the cash price at harvest is only $4.90?

Discuss similarities and differences between futures contracts and forward contracts.

What is an interest-rate swap, and what might motivate a borrower to arrange for one with a bank?

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

The spot price of silver closes at $7 per ounce at the expiration of an option contract.Which one of the following option positions will have value?

Hedging reduces risk, but it is seldom cost free.

Producers who hedge through the purchase of put options must remember that they may be:

Which of the following statements is correct?

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

A producer that is worried about the future price that will be available when the product is to be sold can hedge this price risk by:

Regarding the profitability of options, it is impossible for a producer who sells put options to lose more than the exercise price agreed in the option contract.

There is perhaps a negative connotation about the term "speculators." Discuss the essential purpose that they serve in providing the ability to hedge.

Which of the following characteristics is similar in both futures and forward contracts?

Which of the following is least responsible for the success of futures exchanges such as the Winnipeg Commodity Exchange?

Selling a futures contract may be appropriate for one who wishes to:

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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