Question 1

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 2

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 3

A large dental lab plans to purchase 1,000 ounces of gold in 1 month. Assume that gold prices can be $280, $300, or $320 an ounce.
a. What will total expenses be if the firm purchases call options on 1,000 ounces of gold with an exercise price of $300 an ounce? The options cost $3 per ounce.
b. What will total expenses be if the firm purchases call options on 1,000 ounces of gold with an exercise price of $295 an ounce? These options cost $7 per ounce.

Accepted Answer

@#IMG-DLM& The more expensive calls (wit

Question 4

Hedging reduces risks and also adds profit to a firm.

Accepted Answer

A) True 
 B)False

Question 5

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 6

Consolidated Bakeries needs to acquire 100,000 bushels of wheat each quarter. The spot price is $6.75 per bushel but is expected to increase. Consolidated can purchase call options on 5,000 bushels of wheat with a strike price of $6.80 per bushel and a premium of $0.03 per bushel. Calculate total expected savings from purchasing the options if wheat is forecasted to sell at $6.90 per bushel in 3 months. Conversely, how much did it cost to hedge if the wheat price is unchanged in 3 months?

Accepted Answer

Consolidated will have an all-in cost of

Question 7

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

Accepted Answer

A)  There is an exchange of loan contracts 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 of loan contracts 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 8

Financial futures contracts are available through the Chicago Board of Trade and the Chicago Mercantile Exchange.

Accepted Answer

A) True 
 B)False

Question 9

Mexico purchased call options to lock in the price of its oil and create a base floor for its revenue stream.

Accepted Answer

A) True 
 B)False

Question 10

You enter into a forward contract to take delivery of 1 million euros 3 months from now. What happens to the price you will pay at expiration if the euro depreciates during the contract period?

Accepted Answer

A)  Your price will increase. 
B)  Your price will decrease. 
C)  Your price was fixed at the onset of the contract. 
D) Your price was fixed but you will receive correspondingly more euros due to the depreciation. 
A)  Your price will increase. 
B)  Your price will decrease. 
C)  Your price was fixed at the onset of the contract. 
D) Your price was fixed but you will receive correspondingly more euros due to the depreciation.

Question 11

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 $6.90 per bushel.

Accepted Answer

The process of marking to market records

Question 12

General Mills paid a premium of $0.10 per bushel to buy September call options for wheat with an exercise price of $6.80. If the price of wheat at the expiration is $6.90, what is the net cost of one bushel of wheat for General Mills?

Accepted Answer

A)  $6.70 
B)  $6.80 
C)  $6.90 
D) $7.00 
A)  $6.70 
B)  $6.80 
C)  $6.90 
D) $7.00

Question 13

Firms A and B face the following borrowing rates for a 5-year fixed-rate debt issue in U.S. dollars or euros:
B. Here is how the swap might work.
Step 1: Firm B borrows $1,000 at a 6% rate in the United States (where it has a comparative advantage) and is obligated to pay $60 per year for 4 years and $1,060 in the fifth year.

Accepted Answer

@#IMG-DLM& Suppose that firm A wishes to borrow U.

Question 14

A gasoline distributor buys a gasoline futures contract that requires acceptance of 42,000 gallons of gasoline at $2.94 per gallon. How is the account marked to market if gasoline futures close the next day at $2.97?

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 15

Futures contracts are standardized to expire on the same day each year.

Accepted Answer

A) True 
 B)False

Question 16

An oil producer would sell, rather than buy, crude oil futures for protection from falling prices.

Accepted Answer

A) True 
 B)False

Question 17

Both the seller and the buyer in a futures contract are required to put up margins.

Accepted Answer

A) True 
 B)False

Question 18

A futures contract seller is obligated to deliver 5,000 bushels of soybeans for $12.00 per bushel at expiration. If soybean futures close at $12.10 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 $12.00. 
D) will receive a check 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 $12.00. 
D) will receive a check for $500 from the buyer of the contract.

Question 19

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 20

A swap is the arrangement by two counterparties to exchange one stream of cash flows for another.

Accepted Answer

A) True 
 B)False

Exam 24: Risk Management

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

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

Hedging reduces risks and also adds profit to a firm.

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

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

Financial futures contracts are available through the Chicago Board of Trade and the Chicago Mercantile Exchange.

Mexico purchased call options to lock in the price of its oil and create a base floor for its revenue stream.

You enter into a forward contract to take delivery of 1 million euros 3 months from now. What happens to the price you will pay at expiration if the euro depreciates during the contract period?

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 $6.90 per bushel.

General Mills paid a premium of $0.10 per bushel to buy September call options for wheat with an exercise price of $6.80. If the price of wheat at the expiration is $6.90, what is the net cost of one bushel of wheat for General Mills?

A gasoline distributor buys a gasoline futures contract that requires acceptance of 42,000 gallons of gasoline at $2.94 per gallon. How is the account marked to market if gasoline futures close the next day at $2.97?

Futures contracts are standardized to expire on the same day each year.

An oil producer would sell, rather than buy, crude oil futures for protection from falling prices.

Both the seller and the buyer in a futures contract are required to put up margins.

A futures contract seller is obligated to deliver 5,000 bushels of soybeans for $12.00 per bushel at expiration. If soybean futures close at $12.10 the next day, the seller:

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

A swap is the arrangement by two counterparties to exchange one stream of cash flows for another.

Goals and Governance of the Corporation

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

How Corporations Raise Venture Capital and Issue Securities

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

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