Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

Which of the following statements is correct?

Accepted Answer

A)  An option seller makes more profits than an option buyer. 
B)  A futures seller makes more profits than a futures buyer. 
C)  A futures buyer's profit will be equal to the futures seller's loss. 
D)  Both futures buyer and seller makes profit. 
A)  An option seller makes more profits than an option buyer. 
B)  A futures seller makes more profits than a futures buyer. 
C)  A futures buyer's profit will be equal to the futures seller's loss. 
D)  Both futures buyer and seller makes profit.

Question 3

Which of the following characteristics is similar in both futures and forward contracts?

Accepted Answer

A)  Future asset transactions are conducted at an agreed price. 
B)  Contracts are sold through organized exchanges. 
C)  Contract terms are standardized. 
D)  Price changes are settled daily. 
A)  Future asset transactions are conducted at an agreed price. 
B)  Contracts are sold through organized exchanges. 
C)  Contract terms are standardized. 
D)  Price changes are settled daily.

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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 6

How can companies use swaps to change the risk of securities that they have issued?

Accepted Answer

Swaps allow firms to exchange one series

Question 7

If managers are rational,they will hedge only when they perceive that:

Accepted Answer

A)  prices are headed in an adverse direction. 
B)  derivative instruments are priced lower than actual value. 
C)  risk reduction is preferable to higher potential profits. 
D)  they can increase their profitability by doing so. 
A)  prices are headed in an adverse direction. 
B)  derivative instruments are priced lower than actual value. 
C)  risk reduction is preferable to higher potential profits. 
D)  they can increase their profitability by doing so.

Question 8

Forward contracts are equivalent to tailor-made futures contracts.

Accepted Answer

A) True 
 B)False

Question 9

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 10

Which of the following is not correct concerning the financial futures markets?

Accepted Answer

A)  One of the prominent exchanges for financial futures is the Chicago Board of Trade. 
B)  The contracts were first traded in 1972. 
C)  A major use is protection from interest rate risk. 
D)  Trading in commodity futures significantly exceeds trading in financial futures. 
A)  One of the prominent exchanges for financial futures is the Chicago Board of Trade. 
B)  The contracts were first traded in 1972. 
C)  A major use is protection from interest rate risk. 
D)  Trading in commodity futures significantly exceeds trading in financial futures.

Question 11

The seller of a copper futures contract noticed that his account was marked with a $500 gain yesterday.If the standardized contract requires delivery of 25,000 pounds of copper,what happened that day to the price of copper?

Accepted Answer

A)  The price closed down $0.02 per pound. 
B)  The price closed up $0.02 per pound. 
C)  The price closed down $0.20 per pound. 
D)  The price closed up $0.20 per pound. 
A)  The price closed down $0.02 per pound. 
B)  The price closed up $0.02 per pound. 
C)  The price closed down $0.20 per pound. 
D)  The price closed up $0.20 per pound.

Question 12

Currency swaps are used to:

Accepted Answer

A)  lock in an exchange rate for future delivery of a foreign currency. 
B)  effectively transform loans originated in one currency to a different currency. 
C)  transform fixed-rate loans into variable-rate loans. 
D)  exchange foreign currencies in amounts not possible in the foreign exchange market. 
A)  lock in an exchange rate for future delivery of a foreign currency. 
B)  effectively transform loans originated in one currency to a different currency. 
C)  transform fixed-rate loans into variable-rate loans. 
D)  exchange foreign currencies in amounts not possible in the foreign exchange market.

Question 13

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,e

Question 14

What do you think are the advantages of holding futures rather than the underlying commodity? What do you think are the disadvantages?

Accepted Answer

One advantage of holding futures is the

Question 15

At the expiration of a futures contract,the futures price will be:

Accepted Answer

A)  greater than spot price. 
B)  equal to the spot price. 
C)  less than the spot price. 
D)  more than the forward price. 
A)  greater than spot price. 
B)  equal to the spot price. 
C)  less than the spot price. 
D)  more than the forward price.

Question 16

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 17

A farmer stores his fall harvest of corn and sells corn futures for March delivery at $2.50 per bushel.In March the spot price of corn is $2.20 per bushel.Which of the following is correct?

Accepted Answer

A)  The farmer is obligated to deliver corn to the futures buyer at $2.20. 
B)  The farmer has locked in an effective price of $2.50 per bushel. 
C)  The farmer would have been better off without the futures contact. 
D)  The farmer will receive $4.70 per bushel, which more than doubles the profit obtained without futures. 
A)  The farmer is obligated to deliver corn to the futures buyer at $2.20. 
B)  The farmer has locked in an effective price of $2.50 per bushel. 
C)  The farmer would have been better off without the futures contact. 
D)  The farmer will receive $4.70 per bushel, which more than doubles the profit obtained without futures.

Question 18

Forward contracts are marked to market.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

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.

Exam 24: Risk Management

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

Which of the following statements is correct?

Which of the following characteristics is similar in both futures and forward contracts?

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

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

How can companies use swaps to change the risk of securities that they have issued?

If managers are rational,they will hedge only when they perceive that:

Forward contracts are equivalent to tailor-made futures contracts.

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

Which of the following is not correct concerning the financial futures markets?

The seller of a copper futures contract noticed that his account was marked with a $500 gain yesterday.If the standardized contract requires delivery of 25,000 pounds of copper,what happened that day to the price of copper?

Currency swaps are used to:

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

What do you think are the advantages of holding futures rather than the underlying commodity? What do you think are the disadvantages?

At the expiration of a futures contract,the futures price will be:

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

A farmer stores his fall harvest of corn and sells corn futures for March delivery at $2.50 per bushel.In March the spot price of corn is $2.20 per bushel.Which of the following is correct?

Forward contracts are marked to market.

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

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

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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