Question 1

The profit to the buyer of a futures contract is equal to the initial futures price minus the ultimate market price.

Accepted Answer

A) True 
 B)False  False

Question 2

The activities of speculators are necessary in the futures markets in order to:

Accepted Answer

A)  prevent hedgers from trading options. 
B)  provide a continual stream of profit to hedgers. 
C)  maintain futures prices at appropriate levels. 
D) understand the direction of future price changes. 
A)  prevent hedgers from trading options. 
B)  provide a continual stream of profit to hedgers. 
C)  maintain futures prices at appropriate levels. 
D) understand the direction of future price changes. C

Question 3

All companies work hard to hedge their exposure to price fluctuations.

Accepted Answer

A) True 
 B)False  False

Question 4

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 5

When two borrowers engage in a currency swap, they agree to:

Accepted Answer

A)  a one-time currency exchange equal to the principal amount borrowed. 
B)  make payments on each other's borrowings in a different currency. 
C)  pay to each other any depreciation or appreciation of the currency. 
D) exchange fixed-rate interest payments for variable-rate interest payments. 
A)  a one-time currency exchange equal to the principal amount borrowed. 
B)  make payments on each other's borrowings in a different currency. 
C)  pay to each other any depreciation or appreciation of the currency. 
D) exchange fixed-rate interest payments for variable-rate interest payments.

Question 6

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 7

It is impossible for a producer who sells put options to lose more than the price of the option premium.

Accepted Answer

A) True 
 B)False

Question 8

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. 
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. 
C)  are concerned only with long-term price movements. 
D) take a position in more than one commodity at a time.

Question 9

How can options, futures, and forward contracts be used to devise simple hedging strategies?

Accepted Answer

Options are often used by firms to limit

Question 10

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 11

Interest rate swaps allow both counterparties to:

Accepted Answer

A)  reduce interest expenses. 
B)  avoid repayment of the notional principal. 
C)  rearrange their balance sheets. 
D) pay a floating rate of interest on their debt. 
A)  reduce interest expenses. 
B)  avoid repayment of the notional principal. 
C)  rearrange their balance sheets. 
D) pay a floating rate of interest on their debt.

Question 12

Which one 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 13

Counterparties to an interest rate swap exchange both interest payments and principal amounts.

Accepted Answer

A) True 
 B)False

Question 14

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. 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 15

Purchasing an insurance policy is one means of reducing risk.

Accepted Answer

A) True 
 B)False

Question 16

Swap contracts can be based on either interest rates or currencies.

Accepted Answer

A) True 
 B)False

Question 17

A firm might enter a swap contract whereby it agrees 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 18

Which one of the following is not correct concerning futures contracts?

Accepted Answer

A)  Futures contracts entail an obligation rather than an option. 
B)  The contract price is set at the beginning of the contract. 
C)  The contracts are exchange-traded. 
D) All gains or losses are recorded at contract expiration. 
A)  Futures contracts entail an obligation rather than an option. 
B)  The contract price is set at the beginning of the contract. 
C)  The contracts are exchange-traded. 
D) All gains or losses are recorded at contract expiration.

Question 19

The derivatives market is characterized by:

Accepted Answer

A)  stability. 
B)  innovation. 
C)  predictability. 
D) private deals. 
A)  stability. 
B)  innovation. 
C)  predictability. 
D) private deals.

Question 20

A soybean oil contract calls for delivery of 60,000 pounds. What happens to the seller of a soybean futures contract at 41 cents per pound if the futures price closes the next day at 42 cents per pound?

Accepted Answer

A)  The contract is marked to market with a $600 loss. 
B)  The contract is marked to market with a $600 gain. 
C)  Futures contracts are voided if the price increases prior to expiration. 
D) Nothing happens until the expiration of the contract. 
A)  The contract is marked to market with a $600 loss. 
B)  The contract is marked to market with a $600 gain. 
C)  Futures contracts are voided if the price increases prior to expiration. 
D) Nothing happens until the expiration of the contract.

Exam 24: Risk Management

The profit to the buyer of a futures contract is equal to the initial futures price minus the ultimate market price.

The activities of speculators are necessary in the futures markets in order to:

All companies work hard to hedge their exposure to price fluctuations.

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

When two borrowers engage in a currency swap, they agree to:

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

It is impossible for a producer who sells put options to lose more than the price of the option premium.

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

How can options, futures, and forward contracts be used to devise simple hedging strategies?

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

Interest rate swaps allow both counterparties to:

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

Counterparties to an interest rate swap exchange both interest payments and principal amounts.

Purchasing an insurance policy is one means of reducing risk.

Swap contracts can be based on either interest rates or currencies.

A firm might enter a swap contract whereby it agrees to make a series of regular payments in one currency in return for receiving a series of payments in another currency.

Which one of the following is not correct concerning futures contracts?

The derivatives market is characterized by:

A soybean oil contract calls for delivery of 60,000 pounds. What happens to the seller of a soybean futures contract at 41 cents per pound if the futures price closes the next day at 42 cents per pound?

Goals and Governance of the Corporation

Financial Markets and Institutions

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Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

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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

How Corporations Raise Venture Capital and Issue Securities

Debt Policy

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