Question 1

A hedger who buys a futures contract is betting that prices will _____ at the expiration of the contract.

Accepted Answer

A)  decrease 
B)  increase 
C)  remain constant 
D) guarantee high profits 
A)  decrease 
B)  increase 
C)  remain constant 
D) guarantee high profits

Question 2

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 3

PAWS Inc., has structured a currency swap through its bank. PAWS intends to use the funds to finance an expansion in its Irish operations. The terms are that PAWS will borrow $2 million at a 9% rate, with interest only paid in the first 2 years and all principal repaid after three years. The bank will provide punts (Irish currency) at an exchange rate of Ir£0.65/$ and an interest rate of 12%. Illustrate the flows between PAWS and the bank during the 3-year loan.

Accepted Answer

The answer of PAWS Inc., has structured a currency swap...

Question 4

A hedger buys a futures contract that obligates the owner to take delivery of 5,000 bushels of wheat at a price of $6.80 per bushel. At expiration the spot price of wheat is $6.68 per bushel. The hedger has:

Accepted Answer

A)  saved $0.12 per bushel through hedging. 
B)  gained peace of mind at a price of $0.12 per bushel. 
C)  the opportunity to avoid taking delivery since the price declined. 
D) locked in an effective price of $6.68 per bushel. 
A)  saved $0.12 per bushel through hedging. 
B)  gained peace of mind at a price of $0.12 per bushel. 
C)  the opportunity to avoid taking delivery since the price declined. 
D) locked in an effective price of $6.68 per bushel.

Question 5

A farmer can hedge the risk of downward movement in the price of his product by:

Accepted Answer

A)  buying a call option. 
B)  selling a put option. 
C)  buying a put option. 
D) buying a futures contract. 
A)  buying a call option. 
B)  selling a put option. 
C)  buying a put option. 
D) buying a futures contract.

Question 6

A producer has purchased cotton futures that involve 50,000 pounds of cotton at a price of $0.80 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 $0.07 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 $0.07 per pound in the cash market.

Question 7

Futures contracts are custom-tailored forward contracts.

Accepted Answer

A) True 
 B)False

Question 8

By using options a firm can protect against increases in raw material prices, while continuing to benefit from price decreases.

Accepted Answer

A) True 
 B)False

Question 9

Why are most futures contracts not settled through delivery of the product?

Accepted Answer

A)  Most contracts are settled through the margin account. 
B)  Most contracts expire with neither party having an obligation to the other party. 
C)  Most participants cancel their futures contracts through purchase of an option contract. 
D) It is easier and cheaper to settle in cash or by offset. 
A)  Most contracts are settled through the margin account. 
B)  Most contracts expire with neither party having an obligation to the other party. 
C)  Most participants cancel their futures contracts through purchase of an option contract. 
D) It is easier and cheaper to settle in cash or by offset.

Question 10

One distinguishing difference between the buyer of a futures contract and the buyer of an option contract is that the futures buyer:

Accepted Answer

A)  pays a much higher premium than option buyers. 
B)  has an obligation to purchase, not a choice. 
C)  can lose no more than the initial premium. 
D) has increased rather than reduced risk. 
A)  pays a much higher premium than option buyers. 
B)  has an obligation to purchase, not a choice. 
C)  can lose no more than the initial premium. 
D) has increased rather than reduced risk.

Question 11

A miller can hedge the price risk on wheat by:

Accepted Answer

A)  buying put options on wheat. 
B)  selling call options on wheat. 
C)  buying wheat futures. 
D) selling wheat futures. 
A)  buying put options on wheat. 
B)  selling call options on wheat. 
C)  buying wheat futures. 
D) selling wheat futures.

Question 12

A number of copper producers have found that hedging increases their debt capacity.

Accepted Answer

A) True 
 B)False

Question 13

Which one of the following futures contracts is written on a nondeliverable asset?

Accepted Answer

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

Question 14

Manufacturers who are concerned about volatile commodity prices often use option contracts to alter their risks. What is the worst-case scenario for a seller of put options on corn with a strike price of $4.75 per bushel?

Accepted Answer

A)  If corn prices drop below $4.75 the option premium will be lost. 
B)  If corn prices rise above $4.75 the option premium will be lost. 
C)  Losses can be large if prices drop sufficiently. 
D) Losses can be unlimited if prices rise sufficiently. 
A)  If corn prices drop below $4.75 the option premium will be lost. 
B)  If corn prices rise above $4.75 the option premium will be lost. 
C)  Losses can be large if prices drop sufficiently. 
D) Losses can be unlimited if prices rise sufficiently.

Question 15

If you live in certain cities, you can hedge against a change in the price of your home by purchasing a real estate futures contract on the Chicago Mercantile Exchange.

Accepted Answer

A) True 
 B)False

Question 16

What has happened to cause a $250 loss to be marked to the margin account of a futures contract buyer?

Accepted Answer

A)  The commodity decreased in value on that day. 
B)  The commodity increased in value on that day. 
C)  The commodity decreased in value by $250 over the contract's life. 
D) The commodity increased in value by $250 over the contract's life. 
A)  The commodity decreased in value on that day. 
B)  The commodity increased in value on that day. 
C)  The commodity decreased in value by $250 over the contract's life. 
D) The commodity increased in value by $250 over the contract's life.

Question 17

It is impossible for a producer who sells put options to lose more than the exercise price agreed upon in the option contract.

Accepted Answer

A) True 
 B)False

Question 18

Managers are willing to pay a price to hedge because:

Accepted Answer

A)  they receive increased profits in return. 
B)  the returns on derivative instruments are not taxed. 
C)  they value the reduction in uncertainty. 
D) it permits the managers to receive higher cash bonuses. 
A)  they receive increased profits in return. 
B)  the returns on derivative instruments are not taxed. 
C)  they value the reduction in uncertainty. 
D) it permits the managers to receive higher cash bonuses.

Question 19

A farmer who sells a futures contract is betting that prices will _____ at the expiration of the contract.

Accepted Answer

A)  decrease 
B)  increase 
C)  remain constant 
D) guarantee high profits 
A)  decrease 
B)  increase 
C)  remain constant 
D) guarantee high profits

Question 20

Speculation is foolish unless you have reason to believe that the odds are stacked in your favor.

Accepted Answer

A) True 
 B)False

Exam 24: Risk Management

A hedger who buys a futures contract is betting that prices will _____ at the expiration of the contract.

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

A hedger buys a futures contract that obligates the owner to take delivery of 5,000 bushels of wheat at a price of $6.80 per bushel. At expiration the spot price of wheat is $6.68 per bushel. The hedger has:

A farmer can hedge the risk of downward movement in the price of his product by:

A producer has purchased cotton futures that involve 50,000 pounds of cotton at a price of $0.80 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:

Futures contracts are custom-tailored forward contracts.

By using options a firm can protect against increases in raw material prices, while continuing to benefit from price decreases.

Why are most futures contracts not settled through delivery of the product?

One distinguishing difference between the buyer of a futures contract and the buyer of an option contract is that the futures buyer:

A miller can hedge the price risk on wheat by:

A number of copper producers have found that hedging increases their debt capacity.

Which one of the following futures contracts is written on a nondeliverable asset?

Manufacturers who are concerned about volatile commodity prices often use option contracts to alter their risks. What is the worst-case scenario for a seller of put options on corn with a strike price of $4.75 per bushel?

If you live in certain cities, you can hedge against a change in the price of your home by purchasing a real estate futures contract on the Chicago Mercantile Exchange.

What has happened to cause a $250 loss to be marked to the margin account of a futures contract buyer?

It is impossible for a producer who sells put options to lose more than the exercise price agreed upon in the option contract.

Managers are willing to pay a price to hedge because:

A farmer who sells a futures contract is betting that prices will _____ at the expiration of the contract.

Speculation is foolish unless you have reason to believe that the odds are stacked in your favor.

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

Options

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