Question 1

If a firm purchases a cap at 10% this will:

Accepted Answer

A)  limit the amount of borrowing to 10% of assets. 
B)  pay the firm 10% on their purchase. 
C)  pay the holder the LIBOR interest above 10%. 
D)  pay the holder the LIBOR interest below the 10%. 
E)  None of these. 
A)  limit the amount of borrowing to 10% of assets. 
B)  pay the firm 10% on their purchase. 
C)  pay the holder the LIBOR interest above 10%. 
D)  pay the holder the LIBOR interest below the 10%. 
E)  None of these.

Question 2

Two key features of futures contracts that make them more in demand than forward contracts are:

Accepted Answer

A)  futures are traded on exchanges and must be marked to the market. 
B)  futures contracts allow flexibility in delivery dates and provide a liquid market for netting positions. 
C)  futures are marked to the market and allow delivery flexibility. 
D)  futures are traded in liquid markets and are marked to the market. 
E)  All of 
A)  futures are traded on exchanges and must be marked to the market. 
B)  futures contracts allow flexibility in delivery dates and provide a liquid market for netting positions. 
C)  futures are marked to the market and allow delivery flexibility. 
D)  futures are traded in liquid markets and are marked to the market. 
E)  All of

Question 3

A mortgage banker had made loan commitments for $10 million in 3 months. How many contracts on Treasury bonds futures must the banker write or buy?

Accepted Answer

A)  Go short 10. 
B)  Go short 100. 
C)  Go long 10. 
D)  Go long 100. 
E)  None of these. 
A)  Go short 10. 
B)  Go short 100. 
C)  Go long 10. 
D)  Go long 100. 
E)  None of these.

Question 4

A Treasury note with a maturity of 2 years pays interest semi-annually on a 9 percent annual coupon rate. The $1,000 face value is returned at maturity. If the effective annual yield for all maturities is 7 percent annually,what is the current price of the Treasury note?

Accepted Answer

A)  $960.68 
B)  $986.69 
C)  $1,010.35 
D)  $1,034.40 
E)  $1,038.99 
A)  $960.68 
B)  $986.69 
C)  $1,010.35 
D)  $1,034.40 
E)  $1,038.99

Question 5

Exotic derivatives are complicated blends of other derivatives. Some exotics are:

Accepted Answer

A)  inverse floaters. 
B)  cap and floors. 
C)  futures. 
D)  Both inverse floaters; and cap and floors. 
E)  Both cap and floors; and futures. 
A)  inverse floaters. 
B)  cap and floors. 
C)  futures. 
D)  Both inverse floaters; and cap and floors. 
E)  Both cap and floors; and futures.

Question 6

What new asset duration will immunize the balance sheet?

Accepted Answer

Given D_L = 1.111,then

Question 7

Futures contracts contrast with forward contracts by:

Accepted Answer

A)  trading on an organized exchange. 
B)  marking to the market on a daily basis. 
C)  allowing the seller to deliver any day over the delivery month. 
D)  All of these. 
E)  None of these. 
A)  trading on an organized exchange. 
B)  marking to the market on a daily basis. 
C)  allowing the seller to deliver any day over the delivery month. 
D)  All of these. 
E)  None of these.

Question 8

A bank has a $100 million mortgage bond risk position which it hedges in the Treasury bond futures markets at the Chicago Board of Trade. Approximately how many contracts are needed to be held in the hedge?

Accepted Answer

A)  10 
B)  100 
C)  1,000 
D)  10,000 
E)  100,000 
A)  10 
B)  100 
C)  1,000 
D)  10,000 
E)  100,000

Question 9

If a firm sells a floor at 6% this will:

Accepted Answer

A)  pay the holder the LIBOR interest below the 6%. 
B)  pay the firm 6% on their purchase. 
C)  pay the holder the LIBOR interest above 6%. 
D)  limit the amount of borrowing to 6% of assets. 
E)  None of these. 
A)  pay the holder the LIBOR interest below the 6%. 
B)  pay the firm 6% on their purchase. 
C)  pay the holder the LIBOR interest above 6%. 
D)  limit the amount of borrowing to 6% of assets. 
E)  None of these.

Question 10

A potential disadvantage of forward contracts versus futures contracts is:

Accepted Answer

A)  the extra liquidity required to cover the potential outflows that occur prior to delivery and caused by marking to market. 
B)  the incentive for a particular party to default. 
C)  that the buyers and sellers don't know each other and never meet. 
D)  All of these. 
E)  Both the extra liquidity required to cover the potential outflows that occur prior to delivery and caused by marking to market; and that the buyers and sellers don't know each other and never meet. 
A)  the extra liquidity required to cover the potential outflows that occur prior to delivery and caused by marking to market. 
B)  the incentive for a particular party to default. 
C)  that the buyers and sellers don't know each other and never meet. 
D)  All of these. 
E)  Both the extra liquidity required to cover the potential outflows that occur prior to delivery and caused by marking to market; and that the buyers and sellers don't know each other and never meet.

Question 11

A futures contract on gold states that buyers and sellers agree to make or take delivery of an ounce of gold for $400 per ounce. The contract expires in 3 months. The current price of gold is $400 per ounce. If the price of gold rises and continues to rise every day over the 3 month period,then when the contract is settled,the buyer will _____ and the seller will _____.

Accepted Answer

A)  lose; gain 
B)  gain; lose 
C)  gain; break even 
D)  gain; gain 
E)  lose; lose 
A)  lose; gain 
B)  gain; lose 
C)  gain; break even 
D)  gain; gain 
E)  lose; lose

Question 12

If rates in the market fall between now and one month from now,the mortgage banker:

Accepted Answer

A)  loses as the mortgages are sold at a discount. 
B)  gains as the mortgages are sold at a discount. 
C)  loses as the mortgages are sold at a premium. 
D)  gains as the mortgages are sold at a premium. 
E)  neither gains nor loses. 
A)  loses as the mortgages are sold at a discount. 
B)  gains as the mortgages are sold at a discount. 
C)  loses as the mortgages are sold at a premium. 
D)  gains as the mortgages are sold at a premium. 
E)  neither gains nor loses.

Question 13

The buyer of a forward contract:

Accepted Answer

A)  will be taking delivery of the good(s) today at today's price. 
B)  will be making delivery of the good(s) at a later date at that date's price. 
C)  will be making delivery of the good(s) today at today's price. 
D)  will be taking delivery of the good(s) at a later date at pre-specified price. 
E)  Both will be taking delivery of the good(s) today at today's price or will be taking delivery of the good(s) at a later date at pre-specified pricE. 
A)  will be taking delivery of the good(s) today at today's price. 
B)  will be making delivery of the good(s) at a later date at that date's price. 
C)  will be making delivery of the good(s) today at today's price. 
D)  will be taking delivery of the good(s) at a later date at pre-specified price. 
E)  Both will be taking delivery of the good(s) today at today's price or will be taking delivery of the good(s) at a later date at pre-specified pricE.

Question 14

An inverse floater and a super-inverse floater are more valuable to a purchaser if:

Accepted Answer

A)  interest rates stay the same. 
B)  interest rates fall. 
C)  interest rates rise. 
D)  held for a long time. 
E)  None of these. 
A)  interest rates stay the same. 
B)  interest rates fall. 
C)  interest rates rise. 
D)  held for a long time. 
E)  None of these.

Question 15

On March 1,you contract to take delivery of 1 ounce of gold for $415. The agreement is good for any day up to April 1. Throughout March,the price of gold hit a low of $385 and hit a high of $435. The price settled on March 31 at $420,and on April 1st you settle your futures agreement at that price. Your net cash flow is:

Accepted Answer

A)  -$30. 
B)  -$20. 
C)  -$15. 
D)  $5. 
E)  $20. 
A)  -$30. 
B)  -$20. 
C)  -$15. 
D)  $5. 
E)  $20.

Question 16

In the practical use of credit default swaps there:

Accepted Answer

A)  is not an organized exchange or template for the agreement. 
B)  is an organized exchange or template for the agreement. 
C)  are laws making them illegal in the United States. 
D)  are limits to the amount of borrowing of both parties. 
E)  None of these. 
A)  is not an organized exchange or template for the agreement. 
B)  is an organized exchange or template for the agreement. 
C)  are laws making them illegal in the United States. 
D)  are limits to the amount of borrowing of both parties. 
E)  None of these.

Question 17

On March 1,you contract to take delivery of 1 ounce of gold for $495. The agreement is good for any day up to April 1. Throughout March,the price of gold hit a low of $425 and hit a high of $535. The price settled on March 31 at $505,and on April 1st you settle your futures agreement at that price. Your net cash flow is:

Accepted Answer

A)  -$30. 
B)  -$20. 
C)  -$15. 
D)  $10. 
E)  $20. 
A)  -$30. 
B)  -$20. 
C)  -$15. 
D)  $10. 
E)  $20.

Question 18

When interest rates shift,the price of zero coupon bonds:

Accepted Answer

A)  are more volatile as compared with short-term bonds of the same maturity. 
B)  are less volatile as compared with short-term bonds of the same maturity. 
C)  are more volatile as compared with long-term bonds of the same maturity. 
D)  are less volatile as compared with long-term bonds of the same maturity. 
E)  Both are more volatile as compared with short-term bonds of the same maturity; and are more volatile as compared with long-term bonds of the same maturity. 
A)  are more volatile as compared with short-term bonds of the same maturity. 
B)  are less volatile as compared with short-term bonds of the same maturity. 
C)  are more volatile as compared with long-term bonds of the same maturity. 
D)  are less volatile as compared with long-term bonds of the same maturity. 
E)  Both are more volatile as compared with short-term bonds of the same maturity; and are more volatile as compared with long-term bonds of the same maturity.

Question 19

To protect against interest rate risk,the mortgage banker should:

Accepted Answer

A)  buy futures, as this position will hedge losses if rates rise. 
B)  sell futures, as this position will hedge losses if rates rise. 
C)  sell futures, as this position will add to his gains if rates rise. 
D)  buy futures, as this position will add to his gains if rates rise. 
E)  None of these. 
A)  buy futures, as this position will hedge losses if rates rise. 
B)  sell futures, as this position will hedge losses if rates rise. 
C)  sell futures, as this position will add to his gains if rates rise. 
D)  buy futures, as this position will add to his gains if rates rise. 
E)  None of these.

Question 20

Hedging in the futures markets can reduce all risk if:

Accepted Answer

A)  price movements in both the cash and futures markets are perfectly correlated. 
B)  price movements in both the cash and futures markets have zero correlation. 
C)  price movements in both the cash and futures markets are less than perfectly correlated. 
D)  the hedge is a short hedge, but not a long hedge. 
E)  the hedge is a long hedge, but not a short hedgE. 
A)  price movements in both the cash and futures markets are perfectly correlated. 
B)  price movements in both the cash and futures markets have zero correlation. 
C)  price movements in both the cash and futures markets are less than perfectly correlated. 
D)  the hedge is a short hedge, but not a long hedge. 
E)  the hedge is a long hedge, but not a short hedgE.

Exam 25: Derivatives and Hedging Risk

If a firm purchases a cap at 10% this will:

Two key features of futures contracts that make them more in demand than forward contracts are:

A mortgage banker had made loan commitments for $10 million in 3 months. How many contracts on Treasury bonds futures must the banker write or buy?

A Treasury note with a maturity of 2 years pays interest semi-annually on a 9 percent annual coupon rate. The $1,000 face value is returned at maturity. If the effective annual yield for all maturities is 7 percent annually,what is the current price of the Treasury note?

Exotic derivatives are complicated blends of other derivatives. Some exotics are:

What new asset duration will immunize the balance sheet?

Futures contracts contrast with forward contracts by:

A bank has a $100 million mortgage bond risk position which it hedges in the Treasury bond futures markets at the Chicago Board of Trade. Approximately how many contracts are needed to be held in the hedge?

If a firm sells a floor at 6% this will:

A potential disadvantage of forward contracts versus futures contracts is:

If rates in the market fall between now and one month from now,the mortgage banker:

The buyer of a forward contract:

An inverse floater and a super-inverse floater are more valuable to a purchaser if:

In the practical use of credit default swaps there:

When interest rates shift,the price of zero coupon bonds:

To protect against interest rate risk,the mortgage banker should:

Hedging in the futures markets can reduce all risk if:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return: Lessons From Market History

Return and Risk: the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: The Arbitrage Pricing Theory

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers, Acquisitions, and Divestitures

Financial Distress

International Corporate Finance

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