Question 1

A firm can hedge the risk of upward movement in raw material prices by:

Accepted Answer

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

Question 2

The spot price of silver closes at $7 per ounce at the expiration of an option contract.Which one of the following option positions will have value?

Accepted Answer

A)  The buyer of a call with $5 strike price 
B)  The seller of a call with $5 strike price 
C)  The buyer of a put with $5 strike price 
D)  The seller of a put with $5 strike price 
A)  The buyer of a call with $5 strike price 
B)  The seller of a call with $5 strike price 
C)  The buyer of a put with $5 strike price 
D)  The seller of a put with $5 strike price

Question 3

The derivatives market is characterized by:

Accepted Answer

A)  stability. 
B)  innovation. 
C)  riskiness. 
D)  private deals. 
A)  stability. 
B)  innovation. 
C)  riskiness. 
D)  private deals.

Question 4

A futures contract seller is obligated to deliver 5,000 bushels of soybeans for $5.00 per bushel at expiration.If soybean futures close at $5.10 the next day,the seller:

Accepted Answer

A)  has a profit of $500 thus far on the contract. 
B)  has a loss of $500 thus far on the contract. 
C)  has no profit or loss, but is still obligated to deliver 5,000 bushels at $5.00. 
D)  will receive a check for $500 from the buyer of the contract. 
A)  has a profit of $500 thus far on the contract. 
B)  has a loss of $500 thus far on the contract. 
C)  has no profit or loss, but is still obligated to deliver 5,000 bushels at $5.00. 
D)  will receive a check for $500 from the buyer of the contract.

Question 5

In general,when deciding whether a market participant needs to buy or sell futures contracts in order to hedge,the rule could be:

Accepted Answer

A)  buy futures if you have the underlying asset and sell futures if you need the underlying asset. 
B)  sell futures if you have the underlying asset and buy futures if you need the underlying asset. 
C)  buy futures if you want to speculate, sell futures if you want to hedge. 
D)  buy futures if you are willing to have unlimited risk, sell futures if you want capped risk. 
A)  buy futures if you have the underlying asset and sell futures if you need the underlying asset. 
B)  sell futures if you have the underlying asset and buy futures if you need the underlying asset. 
C)  buy futures if you want to speculate, sell futures if you want to hedge. 
D)  buy futures if you are willing to have unlimited risk, sell futures if you want capped risk.

Question 6

Real estate futures on the Chicago Mercantile Exchange were launched in 2006 and enable participants to protect themselves against changes in house prices in 10 U.S.cities.

Accepted Answer

A) True 
 B)False

Question 7

What form of hedging would you suggest for a producer that wishes to be protected from future price decreases but wants to benefit from any future price increases?

Accepted Answer

A)  Buy a call option on the asset 
B)  Sell a call option on the asset 
C)  Buy a put option on the asset 
D)  Sell a put option on the asset 
A)  Buy a call option on the asset 
B)  Sell a call option on the asset 
C)  Buy a put option on the asset 
D)  Sell a put option on the asset

Question 8

Unlike options,a futures contract binds the buyer to buy the commodity at a fixed price.

Accepted Answer

A) True 
 B)False

Question 9

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 10

A hedger buys a futures contract that obligates the owner to take delivery of 5,000 bushels of wheat at a price of $3.30 per bushel.At expiration the spot price of wheat is $3.80 per bushel.The hedger has:

Accepted Answer

A)  saved 50' per bushel through hedging. 
B)  gained peace of mind at a price of 50' per bushel. 
C)  the opportunity to avoid taking delivery, since price declined. 
D)  locked in an effective price of $3.05 per bushel. 
A)  saved 50' per bushel through hedging. 
B)  gained peace of mind at a price of 50' per bushel. 
C)  the opportunity to avoid taking delivery, since price declined. 
D)  locked in an effective price of $3.05 per bushel.

Question 11

Speculators are a necessary component of well-functioning futures markets.

Accepted Answer

A) True 
 B)False

Question 12

An oil producer would sell,rather than buy,crude oil futures for protection from falling prices.

Accepted Answer

A) True 
 B)False

Question 13

Firms A and B face the following borrowing rates for a 5-year fixed-rate debt issue in U.S.dollars or euros:
B. Here is how the swap might work.
Step 1: Firm B borrows $1,000 at a 6% rate in the United States (where it has a comparative advantage) and is obligated to pay $60 per year for 4 years and $1,060 in the fifth year.
Step 2: Firm A calculates that the present value of firm B's debt payments, using its own target 7.5% interest rate, is $939.31. Therefore, firm A borrows this amount of money in Switzerland, where it has its comparative advantage. Firm A borrows 939.31 €. At a 6% interest rate, Firm A must pay:
0.06 x 939.31 = 56.36 euros per year for four years
And then, in the fifth year, Firm A must pay: 56.36 + 939.31 = 995.67 €
Step 3: The two firms enter a swap arrangement to exchange cash flows equal to the other's principal and interest payments. So Firm A pays $60 to Firm B and receives 56.36 € per year for four years. In year 5, Firm A pays $1,060 in return for 995.67 €.
Firm A's net cash flows are as follows: It initially receives $939.31 by exchanging the proceeds from its euro borrowing into dollars. It uses the income from the swap to pay its euro bonds, and pays $60 per year for four years and $1,060 in year 5 on the swap. The effective interest rate (yield to maturity) on this loan is 7.5%, which is better than Firm A could have done in the U.S. (To determine the yield, think of Firm A as effectively issuing a five-year 6% coupon bond for a price of $939.31.)
Firm B receives $1,000 initially, which it exchanges for 1,000 €. Its net cash outflows in the following years are 56.36 €per year for five years and an additional payment of 939.31 €in the fifth year. This corresponds to a yield to maturity of 4.53%, which is a better rate than it could have obtained by borrowing in euros directly. (This is the yield to maturity on a bond sold with a coupon rate of 6%, face value 939.31, at a price of 1,000.)
Both parties receive a better rate than they would have if they had borrowed directly in their preferred currencies.

Accepted Answer

@#IMG-DLM& Suppose that firm A wishes to borrow U.

Question 14

Your firm has just tendered for a contract in Japan.You won't know for 3 months whether you get the contract but if you do,you will receive a payment of 10 million yen a year from now.You are worried that if the yen declines in value,the dollar value of this payment will be less than you expect and the project could even show a loss.Discuss the possible ways that you could protect the firm against a decline in the value of the yen.Illustrate the possible outcomes if you do get the contract and if you don't.

Accepted Answer

One way to protect the position is to se

Question 15

A soybean farmer anticipates the harvest of 10,000 bushels but is concerned about the spot price that may exist at that time.He therefore sells two futures contracts (5,000 bushels each,@ $5.75 per bushel).Unfortunately,the farmer was overly pessimistic,and the spot price at contract expiration is $6.00 per bushel.Ignoring the premium paid,and making the simplifying assumption that the contract was only held for one "day," show the farmer's financial results of hedging.

Accepted Answer

Two contracts sold represent an obligati

Question 16

As a side benefit,better risk management decreases the firm's debt capacity.

Accepted Answer

A) True 
 B)False

Question 17

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 $\le$.65/$ and an interest rate of 12%.Illustrate the flows between PAWS and the bank during the 3-year loan.

Accepted Answer

@#IMG-DLM& (flows in

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

Interest rate swaps allow both counterparties to:

Accepted Answer

A)  reduce interest expenses. 
B)  avoid repayment of the notional principal. 
C)  rearrange the balance sheet. 
D)  pay a floating rate of interest on their debt. 
A)  reduce interest expenses. 
B)  avoid repayment of the notional principal. 
C)  rearrange the balance sheet. 
D)  pay a floating rate of interest on their debt.

Question 20

Selling a futures contract may be appropriate for one who wishes to:

Accepted Answer

A)  lock in a future sales price. 
B)  lock in a future purchase price. 
C)  speculate that future spot prices are going down. 
D)  have a ready market in which to sell product. 
A)  lock in a future sales price. 
B)  lock in a future purchase price. 
C)  speculate that future spot prices are going down. 
D)  have a ready market in which to sell product.

A firm can hedge the risk of upward movement in raw material prices by:

The spot price of silver closes at $7 per ounce at the expiration of an option contract.Which one of the following option positions will have value?

The derivatives market is characterized by:

A futures contract seller is obligated to deliver 5,000 bushels of soybeans for $5.00 per bushel at expiration.If soybean futures close at $5.10 the next day,the seller:

In general,when deciding whether a market participant needs to buy or sell futures contracts in order to hedge,the rule could be:

Real estate futures on the Chicago Mercantile Exchange were launched in 2006 and enable participants to protect themselves against changes in house prices in 10 U.S.cities.

What form of hedging would you suggest for a producer that wishes to be protected from future price decreases but wants to benefit from any future price increases?

Unlike options,a futures contract binds the buyer to buy the commodity at a fixed price.

Managers are willing to pay a price to hedge because:

A hedger buys a futures contract that obligates the owner to take delivery of 5,000 bushels of wheat at a price of $3.30 per bushel.At expiration the spot price of wheat is $3.80 per bushel.The hedger has:

Speculators are a necessary component of well-functioning futures markets.

An oil producer would sell,rather than buy,crude oil futures for protection from falling prices.

As a side benefit,better risk management decreases the firm's debt capacity.

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

Interest rate swaps allow both counterparties to:

Selling a futures contract may be appropriate for one who wishes 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

Risk, Return, and Capital Budgeting

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Filters

Exam 24: Risk Management

A firm can hedge the risk of upward movement in raw material prices by:

The spot price of silver closes at $7 per ounce at the expiration of an option contract.Which one of the following option positions will have value?

The derivatives market is characterized by:

A futures contract seller is obligated to deliver 5,000 bushels of soybeans for $5.00 per bushel at expiration.If soybean futures close at $5.10 the next day,the seller:

In general,when deciding whether a market participant needs to buy or sell futures contracts in order to hedge,the rule could be:

Real estate futures on the Chicago Mercantile Exchange were launched in 2006 and enable participants to protect themselves against changes in house prices in 10 U.S.cities.

What form of hedging would you suggest for a producer that wishes to be protected from future price decreases but wants to benefit from any future price increases?

Unlike options,a futures contract binds the buyer to buy the commodity at a fixed price.

Managers are willing to pay a price to hedge because:

A hedger buys a futures contract that obligates the owner to take delivery of 5,000 bushels of wheat at a price of $3.30 per bushel.At expiration the spot price of wheat is $3.80 per bushel.The hedger has:

Speculators are a necessary component of well-functioning futures markets.

An oil producer would sell,rather than buy,crude oil futures for protection from falling prices.

As a side benefit,better risk management decreases the firm's debt capacity.

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

Interest rate swaps allow both counterparties to:

Selling a futures contract may be appropriate for one who wishes 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

Risk, Return, and Capital Budgeting

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Filters