Question 1

The typical sequence of cash flows in a futures contract is:

Accepted Answer

A)  purchase price plus a margin account up-front, differences are settled at expiration. 
B)  margin account up-front, differences are posted daily and settled in cash if margin drops too low. 
C)  margin account up-front, all differences settled at expiration. 
D) all funds are paid at expiration of the contract. 
A)  purchase price plus a margin account up-front, differences are settled at expiration. 
B)  margin account up-front, differences are posted daily and settled in cash if margin drops too low. 
C)  margin account up-front, all differences settled at expiration. 
D) all funds are paid at expiration of the contract.

Question 2

Which one of the following is a major reason for firms to engage in currency swaps?

Accepted Answer

A)  They will be required to repay only the interest. 
B)  They can obtain more favorable borrowing terms in a different currency. 
C)  The debt will not show on their balance sheets. 
D) Borrowing in a foreign currency offers lucrative tax breaks. 
A)  They will be required to repay only the interest. 
B)  They can obtain more favorable borrowing terms in a different currency. 
C)  The debt will not show on their balance sheets. 
D) Borrowing in a foreign currency offers lucrative tax breaks.

Question 3

A farmer hedged his risk by buying put options on wheat with an exercise price of $6.70 at a price of $0.14 per bushel. If the price of wheat at the expiration of the contract is $6.70, what is the net revenue from each bushel of wheat?

Accepted Answer

A)  $6.56 
B)  $6.63 
C)  $6.70 
D) $6.84 
A)  $6.56 
B)  $6.63 
C)  $6.70 
D) $6.84

Question 4

ABC Corp. entered into a currency swap with its bank, providing that ABC borrows $5 million at 10% and swaps for a 12% yen loan. The spot exchange rate is ¥105/$. If interest only is to be repaid on an annual basis, how much does ABC pay annually to the bank?

Accepted Answer

A)  ¥1.26 million 
B)  ¥5.71 million 
C)  ¥52.50 million 
D) ¥63.00 million 
A)  ¥1.26 million 
B)  ¥5.71 million 
C)  ¥52.50 million 
D) ¥63.00 million

Question 5

While private individuals and firms can hedge risks using options, governments are forbidden from doing so.

Accepted Answer

A) True 
 B)False

Question 6

Discuss similarities and differences between futures contracts and forward contracts.

Accepted Answer

Both futures and forwards set an obligat

Question 7

The seller of a pork bellies futures contract at $1.41 per pound noted that the closing price of pork bellies was $1.44 today. What will happen to this contract, which requires delivery of 40,000 pounds of pork bellies at expiration?

Accepted Answer

A)  A loss of $400 is posted to the account. 
B)  A gain of $400 is posted to the account. 
C)  A loss of $1,200 is posted to the account. 
D) A gain of $1,200 is posted to the account. 
A)  A loss of $400 is posted to the account. 
B)  A gain of $400 is posted to the account. 
C)  A loss of $1,200 is posted to the account. 
D) A gain of $1,200 is posted to the account.

Question 8

Which one of the following is the major difference between forward and futures contracts?

Accepted Answer

A)  Futures contracts are more expensive than forward contracts. 
B)  Forward contracts are available only for foreign currencies. 
C)  Futures contracts are always delivered. 
D) Forward contracts are not marked to market. 
A)  Futures contracts are more expensive than forward contracts. 
B)  Forward contracts are available only for foreign currencies. 
C)  Futures contracts are always delivered. 
D) Forward contracts are not marked to market.

Question 9

Which one of the following is not correct concerning forward contracts? Forward contracts:

Accepted Answer

A)  are not standardized. 
B)  do not set the price until the end of the contract. 
C)  are not traded on organized exchanges. 
D) are not marked to market daily. 
A)  are not standardized. 
B)  do not set the price until the end of the contract. 
C)  are not traded on organized exchanges. 
D) are not marked to market daily.

Question 10

Which one of these firms would probably be most interested in a credit default swap?

Accepted Answer

A)  Corporate farmer 
B)  Pension fund 
C)  Portfolio manager 
D) Financial institution 
A)  Corporate farmer 
B)  Pension fund 
C)  Portfolio manager 
D) Financial institution

Question 11

Why might an individual or organization be willing to swap their fixed-rate loans for floating-rate loans?

Accepted Answer

A)  They may perceive that interest rates are ready to increase. 
B)  Their cash flows may vary directly with interest rates. 
C)  Floating rates may be higher than fixed rates. 
D) They may be able to postpone the payment of principal. 
A)  They may perceive that interest rates are ready to increase. 
B)  Their cash flows may vary directly with interest rates. 
C)  Floating rates may be higher than fixed rates. 
D) They may be able to postpone the payment of principal.

Question 12

Exchange traded futures contracts allow the seller to choose the place of delivery for the commodity.

Accepted Answer

A) True 
 B)False

Question 13

The most active trading in forward contracts is in:

Accepted Answer

A)  U.S. Treasury bills. 
B)  the Standard and Poor's index. 
C)  wheat crops. 
D) foreign currencies. 
A)  U.S. Treasury bills. 
B)  the Standard and Poor's index. 
C)  wheat crops. 
D) foreign currencies.

Question 14

A farmer stores his fall harvest of corn and sells corn futures for March delivery at $7.50 per bushel. In March the spot price of corn is $7.20 per bushel. Which of the following is correct?

Accepted Answer

A)  The farmer is obligated to deliver corn to the futures buyer at $7.20. 
B)  The farmer has locked in an effective price of $7.50 per bushel. 
C)  The farmer would have been better off without the futures contract. 
D) The farmer will receive $7.35 per bushel which is the average of the spot and futures prices. 
A)  The farmer is obligated to deliver corn to the futures buyer at $7.20. 
B)  The farmer has locked in an effective price of $7.50 per bushel. 
C)  The farmer would have been better off without the futures contract. 
D) The farmer will receive $7.35 per bushel which is the average of the spot and futures prices.

Question 15

Hershey's Chocolate is concerned about cocoa prices prior to building inventory for Halloween sales. Analysts project that the price per ton could vary from $2,900 to $3,100. A September call option can be purchased with a $2,950 strike price for a premium of $145. What is Hershey's worst-case scenario if it purchases these options?

Accepted Answer

A)  Cocoa prices will rise to $3,100 and Hershey is protected only to a price of $2,950. 
B)  Cocoa prices will decline to $2,850 and Hershey will have to pay an extra $100 per ton. 
C)  Cocoa prices will not rise above Hershey's break-even price of $3,095, which equals the sum of the strike price plus the option premium. 
D) Cocoa prices will fall below $2,950 and Hershey will lose $145 per option contract. 
A)  Cocoa prices will rise to $3,100 and Hershey is protected only to a price of $2,950. 
B)  Cocoa prices will decline to $2,850 and Hershey will have to pay an extra $100 per ton. 
C)  Cocoa prices will not rise above Hershey's break-even price of $3,095, which equals the sum of the strike price plus the option premium. 
D) Cocoa prices will fall below $2,950 and Hershey will lose $145 per option contract.

Question 16

The effect of marking a futures contract to market is similar to:

Accepted Answer

A)  requiring daily payments from the contract buyer. 
B)  requiring daily payments from the contract seller. 
C)  closing the current position and opening a new position daily. 
D) imposing a daily fee on both buyers and sellers. 
A)  requiring daily payments from the contract buyer. 
B)  requiring daily payments from the contract seller. 
C)  closing the current position and opening a new position daily. 
D) imposing a daily fee on both buyers and sellers.

Question 17

Forward contracts are marked to market.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

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

Question 19

A hedger buys a futures contract that obligates the owner to take delivery of 5,000 bushels of wheat at a price of $6.75 per bushel. At expiration the spot price of wheat is $6.80 per bushel. The hedger has:

Accepted Answer

A)  saved $0.05 per bushel through hedging. 
B)  gained peace of mind at a price of $0.05 per bushel. 
C)  the opportunity to avoid taking delivery since the price increased. 
D) locked in an effective price of $6.80 per bushel. 
A)  saved $0.05 per bushel through hedging. 
B)  gained peace of mind at a price of $0.05 per bushel. 
C)  the opportunity to avoid taking delivery since the price increased. 
D) locked in an effective price of $6.80 per bushel.

Question 20

The primary purpose of financial futures is to:

Accepted Answer

A)  benefit from increases in interest rates. 
B)  protect against swings in interest rates or prices of financial assets. 
C)  translate one currency into another. 
D) guarantee the repayment of loan principal. 
A)  benefit from increases in interest rates. 
B)  protect against swings in interest rates or prices of financial assets. 
C)  translate one currency into another. 
D) guarantee the repayment of loan principal.

Exam 24: Risk Management

The typical sequence of cash flows in a futures contract is:

Which one of the following is a major reason for firms to engage in currency swaps?

A farmer hedged his risk by buying put options on wheat with an exercise price of $6.70 at a price of $0.14 per bushel. If the price of wheat at the expiration of the contract is $6.70, what is the net revenue from each bushel of wheat?

ABC Corp. entered into a currency swap with its bank, providing that ABC borrows $5 million at 10% and swaps for a 12% yen loan. The spot exchange rate is ¥105/$. If interest only is to be repaid on an annual basis, how much does ABC pay annually to the bank?

While private individuals and firms can hedge risks using options, governments are forbidden from doing so.

Discuss similarities and differences between futures contracts and forward contracts.

The seller of a pork bellies futures contract at $1.41 per pound noted that the closing price of pork bellies was $1.44 today. What will happen to this contract, which requires delivery of 40,000 pounds of pork bellies at expiration?

Which one of the following is the major difference between forward and futures contracts?

Which one of the following is not correct concerning forward contracts? Forward contracts:

Which one of these firms would probably be most interested in a credit default swap?

Why might an individual or organization be willing to swap their fixed-rate loans for floating-rate loans?

Exchange traded futures contracts allow the seller to choose the place of delivery for the commodity.

The most active trading in forward contracts is in:

A farmer stores his fall harvest of corn and sells corn futures for March delivery at $7.50 per bushel. In March the spot price of corn is $7.20 per bushel. Which of the following is correct?

The effect of marking a futures contract to market is similar to:

Forward contracts are marked to market.

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

A hedger buys a futures contract that obligates the owner to take delivery of 5,000 bushels of wheat at a price of $6.75 per bushel. At expiration the spot price of wheat is $6.80 per bushel. The hedger has:

The primary purpose of financial futures is to:

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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