Question 1

What must happen to prices over the course of a contract for the seller of a futures contract to maximize benefits of the hedge?

Accepted Answer

A)  Prices must decrease. 
B)  Prices must increase. 
C)  Prices must remain constant. 
D)  The seller will profit on the hedge regardless of the direction of price movements. 
A)  Prices must decrease. 
B)  Prices must increase. 
C)  Prices must remain constant. 
D)  The seller will profit on the hedge regardless of the direction of price movements. A

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. D

Question 3

A farmer can avoid delivery on a futures contract by buying an offsetting futures contract.

Accepted Answer

A) True 
 B)False  True

Question 4

Which of the following is not correct concerning futures contracts?

Accepted Answer

A)  They 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)  Gains or losses are recorded at contract expiration. 
A)  They 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)  Gains or losses are recorded at contract expiration.

Question 5

The seller of a pork bellies futures contract at $0.41 per pound noted that the closing price of pork bellies was $0.44 today.What will happen to this contract,which requires delivery of 40,000 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 6

Which 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 7

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 $2.25 per bushel?

Accepted Answer

A)  If corn prices drop below $2.25 the option premium will be lost. 
B)  If corn prices rise above $2.25 the option premium will be lost. 
C)  Losses can be unlimited if prices drop sufficiently. 
D)  Losses can be unlimited if prices rise sufficiently. 
A)  If corn prices drop below $2.25 the option premium will be lost. 
B)  If corn prices rise above $2.25 the option premium will be lost. 
C)  Losses can be unlimited if prices drop sufficiently. 
D)  Losses can be unlimited if prices rise sufficiently.

Question 8

If you are not better informed than the highly paid professionals in banks and other institutions,you should use derivatives for hedging,not for speculation.

Accepted Answer

A) True 
 B)False

Question 9

Financial futures contracts are available through the Chicago Board of Trade and guaranteed by the Federal Reserve.

Accepted Answer

A) True 
 B)False

Question 10

Which 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 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 copper producer is worried about the copper prices going down.The risk of downward movement in prices can be hedged by:

Accepted Answer

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

Question 13

A farmer can hedge the risk of downward movement in the price of the produce 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 14

Consolidated Bakeries needs to acquire 100,000 bushels of wheat each quarter.The spot price is $3.75 per bushel but is expected to increase.Consolidated can purchase call options on 5,000 bushels of wheat with a strike price of $3.80 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 $3.90 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 15

What is an interest rate swap,and what might motivate a borrower to arrange for one with a bank?

Accepted Answer

In a typical interest rate swap,only the

Question 16

Financial futures are available to protect against all of the following except:

Accepted Answer

A)  interest rate risk. 
B)  level of equity prices. 
C)  currency swap risk. 
D)  exchange rate risk. 
A)  interest rate risk. 
B)  level of equity prices. 
C)  currency swap risk. 
D)  exchange rate risk.

Question 17

A soybean oil contract calls for delivery of 60,000 pounds.What happens to the seller of a soybean futures contract at 16 cents per pound if the futures price closes the next day at 14 cents per pound?

Accepted Answer

A)  The contract is marked to market with a $1,200 loss. 
B)  The contract is marked to market with a $1,200 gain. 
C)  Futures contracts are voided if price increases before expiration. 
D)  Nothing happens until the expiration of the contract. 
A)  The contract is marked to market with a $1,200 loss. 
B)  The contract is marked to market with a $1,200 gain. 
C)  Futures contracts are voided if price increases before expiration. 
D)  Nothing happens until the expiration of the contract.

Question 18

Why might an individual or organization be willing to swap 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 are not lower 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 are not lower than fixed rates. 
D)  They may be able to postpone the payment of principal.

Question 19

Which 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 20

Which of the following is not generally considered a benefit of hedging?

Accepted Answer

A)  It reduces one or more aspects of business risk. 
B)  It allows prices to be locked in advance. 
C)  The costs of hedging are paid by the speculators. 
D)  It can stabilize profits. 
A)  It reduces one or more aspects of business risk. 
B)  It allows prices to be locked in advance. 
C)  The costs of hedging are paid by the speculators. 
D)  It can stabilize profits.

Exam 24: Risk Management

What must happen to prices over the course of a contract for the seller of a futures contract to maximize benefits of the hedge?

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

A farmer can avoid delivery on a futures contract by buying an offsetting futures contract.

Which of the following is not correct concerning futures contracts?

The seller of a pork bellies futures contract at $0.41 per pound noted that the closing price of pork bellies was $0.44 today.What will happen to this contract,which requires delivery of 40,000 of pork bellies at expiration?

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

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 $2.25 per bushel?

If you are not better informed than the highly paid professionals in banks and other institutions,you should use derivatives for hedging,not for speculation.

Financial futures contracts are available through the Chicago Board of Trade and guaranteed by the Federal Reserve.

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

A miller can hedge the price risk on wheat by:

A copper producer is worried about the copper prices going down.The risk of downward movement in prices can be hedged by:

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

What is an interest rate swap,and what might motivate a borrower to arrange for one with a bank?

Financial futures are available to protect against all of the following except:

A soybean oil contract calls for delivery of 60,000 pounds.What happens to the seller of a soybean futures contract at 16 cents per pound if the futures price closes the next day at 14 cents per pound?

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

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

Which of the following is not generally considered a benefit of hedging?

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

Risk, Return, and Capital Budgeting

Mergers, Acquisitions, and Corporate Control

International Financial Management

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