Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

A forward market contract to buy Japanese yen three months in the future at a price of *105/$ will:

Accepted Answer

A)  insulate the buyer from changes in interest rates. 
B)  protect the buyer from changes in exchange rates. 
C)  lock in a profit based on current exchange rates. 
D)  require delivery of the yen at the Chicago Board of Trade. 
A)  insulate the buyer from changes in interest rates. 
B)  protect the buyer from changes in exchange rates. 
C)  lock in a profit based on current exchange rates. 
D)  require delivery of the yen at the Chicago Board of Trade.

Question 3

Producers who hedge through the purchase of put options must remember that they may be:

Accepted Answer

A)  reducing their profits compared to not hedging. 
B)  obligated to sell their product at a lower than market price. 
C)  increasing their overall risk. 
D)  facing unlimited price risk. 
A)  reducing their profits compared to not hedging. 
B)  obligated to sell their product at a lower than market price. 
C)  increasing their overall risk. 
D)  facing unlimited price risk.

Question 4

The purpose of a margin account for a futures contract is to:

Accepted Answer

A)  guarantee a minimum margin of profit for the contract holder. 
B)  allow futures traders to have more than one contract at once. 
C)  provide a cushion for the exchange against defaults on the contract. 
D)  hold interest payments until expiration. 
A)  guarantee a minimum margin of profit for the contract holder. 
B)  allow futures traders to have more than one contract at once. 
C)  provide a cushion for the exchange against defaults on the contract. 
D)  hold interest payments until expiration.

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

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 $3.90 per bushel.

Accepted Answer

The process of marking to market records

Question 7

What is the basic difference in strategy between buying and selling a futures contract?

Accepted Answer

Assuming that the buyer of a futures con

Question 8

General Mills bought September call options for wheat with an exercise price of $2.80 at a price of $0.10 per bushel.If the price of wheat at the expiration is $2.90,what is the net cost of one bushel of wheat for General Mills?

Accepted Answer

A)  $2.70 
B)  $2.80 
C)  $2.90 
D)  $3.00 
A)  $2.70 
B)  $2.80 
C)  $2.90 
D)  $3.00

Question 9

Regarding the profitability of options,it is impossible for a producer who sells put options to lose more than the price of the option premium.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following futures contract 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 11

Nestlé wishes to obtain a loan denominated in Swiss francs but considers the U.S.market to offer better terms.How can Nestlé accomplish this?

Accepted Answer

A)  Borrow francs in Switzerland, exchange for dollars, and arrange a currency swap. 
B)  Borrow francs in Switzerland, exchange for dollars, and arrange an interest rate swap. 
C)  Borrow dollars in the United States, exchange for francs, and arrange an interest rate swap. 
D)  Borrow dollars in the United States, exchange for francs, and arrange a currency swap. 
A)  Borrow francs in Switzerland, exchange for dollars, and arrange a currency swap. 
B)  Borrow francs in Switzerland, exchange for dollars, and arrange an interest rate swap. 
C)  Borrow dollars in the United States, exchange for francs, and arrange an interest rate swap. 
D)  Borrow dollars in the United States, exchange for francs, and arrange a currency swap.

Question 12

How can options,futures,and forward contracts be used to devise simple hedging strategies?

Accepted Answer

In the last chapter we introduced you to

Question 13

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)  "*105.71 million" 
C)  "*52.50 million" 
D)  "*63.00 million" 
A)  "*1.26 million" 
B)  "*105.71 million" 
C)  "*52.50 million" 
D)  "*63.00 million"

Question 14

There is perhaps a negative connotation about the term "speculators." Discuss the essential purpose that they serve in providing the ability to hedge.

Accepted Answer

Although the futures exchange conducts a

Question 15

The better the risk management policies,the less chance that the firm will incur numerous costs of distress.

Accepted Answer

A) True 
 B)False

Question 16

The profit from a futures contract is the difference between the initial futures price and the spot price at expiration.

Accepted Answer

A) True 
 B)False

Question 17

The basic difference between speculators and hedgers in futures contracts is that speculators:

Accepted Answer

A)  will profit regardless of the direction of price change. 
B)  are not protecting their commodity holdings. 
C)  are concerned only with long-term price movements. 
D)  take a position in more than one commodity at a time. 
A)  will profit regardless of the direction of price change. 
B)  are not protecting their commodity holdings. 
C)  are concerned only with long-term price movements. 
D)  take a position in more than one commodity at a time.

Question 18

Why do companies hedge to reduce risk?

Accepted Answer

Fluctuations in commodity prices,interes

Question 19

When two borrowers engage in a currency swap,they agree to:

Accepted Answer

A)  trade one currency for another, thus avoiding the foreign exchange market. 
B)  make payments on each other's borrowings in a different currency. 
C)  pay to each other any depreciation or appreciation of the currency. 
D)  exchange fixed-rate interest payments for variable-rate interest payments. 
A)  trade one currency for another, thus avoiding the foreign exchange market. 
B)  make payments on each other's borrowings in a different currency. 
C)  pay to each other any depreciation or appreciation of the currency. 
D)  exchange fixed-rate interest payments for variable-rate interest payments.

Question 20

Because most hedging acts to reduce risk,managers should expect that hedging will:

Accepted Answer

A)  increase profits. 
B)  decrease profits. 
C)  increase the firm's stock price. 
D)  stabilize the firm's dividend payout. 
A)  increase profits. 
B)  decrease profits. 
C)  increase the firm's stock price. 
D)  stabilize the firm's dividend payout.

Exam 24: Risk Management

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

A forward market contract to buy Japanese yen three months in the future at a price of *105/$ will:

Producers who hedge through the purchase of put options must remember that they may be:

The purpose of a margin account for a futures contract is to:

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

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 $3.90 per bushel.

What is the basic difference in strategy between buying and selling a futures contract?

General Mills bought September call options for wheat with an exercise price of $2.80 at a price of $0.10 per bushel.If the price of wheat at the expiration is $2.90,what is the net cost of one bushel of wheat for General Mills?

Regarding the profitability of options,it is impossible for a producer who sells put options to lose more than the price of the option premium.

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

Nestlé wishes to obtain a loan denominated in Swiss francs but considers the U.S.market to offer better terms.How can Nestlé accomplish this?

How can options,futures,and forward contracts be used to devise simple hedging strategies?

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?

There is perhaps a negative connotation about the term "speculators." Discuss the essential purpose that they serve in providing the ability to hedge.

The better the risk management policies,the less chance that the firm will incur numerous costs of distress.

The profit from a futures contract is the difference between the initial futures price and the spot price at expiration.

The basic difference between speculators and hedgers in futures contracts is that speculators:

Why do companies hedge to reduce risk?

When two borrowers engage in a currency swap,they agree to:

Because most hedging acts to reduce risk,managers should expect that hedging will:

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

Options

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