Question 1

The derivatives market is characterized by:

Accepted Answer

A)  shrinking activity. 
B)  the introduction of new contracts. 
C)  low turnover. 
D)  regular IPOs. 
A)  shrinking activity. 
B)  the introduction of new contracts. 
C)  low turnover. 
D)  regular IPOs. B

Question 2

Both the seller and the buyer in a futures contract are required to put up margin.

Accepted Answer

A) True 
 B)False  True

Question 3

Which one of the following is a 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 terms by borrowing in a different currency. 
C)  The debt will not show on their balance sheets. 
D)  You can borrow in the currency with the lowest interest rate without taking on any currency risk. 
A)  They will be required to repay only the interest. 
B)  They can obtain more favorable terms by borrowing in a different currency. 
C)  The debt will not show on their balance sheets. 
D)  You can borrow in the currency with the lowest interest rate without taking on any currency risk. B

Question 4

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

Accepted Answer

A)  Future transactions are conducted at a price agreed upon earlier. 
B)  Contracts are sold through organized exchanges. 
C)  Contract terms are standardized by type of commodity. 
D)  Price changes are settled daily in a process known as mark-to-market. 
A)  Future transactions are conducted at a price agreed upon earlier. 
B)  Contracts are sold through organized exchanges. 
C)  Contract terms are standardized by type of commodity. 
D)  Price changes are settled daily in a process known as mark-to-market.

Question 5

How might a firm such as General Mills protect itself against fluctuations in raw material prices for breakfast cereals?

Accepted Answer

A)  Buy commodity futures 
B)  Sell commodity futures 
C)  Buy put options on commodities 
D)  Sell put options on commodities 
A)  Buy commodity futures 
B)  Sell commodity futures 
C)  Buy put options on commodities 
D)  Sell put options on commodities

Question 6

Which one of the following is not correct concerning futures contracts?

Accepted Answer

A)  Futures contracts 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 and losses are not settled until the contract expires. 
A)  Futures contracts 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 and losses are not settled until the contract expires.

Question 7

Zeta Corp wishes to obtain a loan denominated in Swiss francs but the U.S.market offers better credit terms.What should Zeta do?

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 8

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

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

A speculator who sells a futures contract is betting that prices will _____ by the expiration of the contract.

Accepted Answer

A)  decrease 
B)  increase 
C)  remain constant 
D)  Be unusually volatile 
A)  decrease 
B)  increase 
C)  remain constant 
D)  Be unusually volatile

Question 11

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

Accepted Answer

A)  Hedging reduces business risk. 
B)  Hedging allows prices to be locked in ahead of time. 
C)  Hedging can be very profitable. 
D)  Hedging can stabilize profits. 
A)  Hedging reduces business risk. 
B)  Hedging allows prices to be locked in ahead of time. 
C)  Hedging can be very profitable. 
D)  Hedging can stabilize profits.

Question 12

A commodity producer who is worried about future prices can best hedge 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 13

A farmer 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 futures buyer is required to deliver corn to the farmer 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 futures buyer is required to deliver corn to the farmer 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 14

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)  do not have an offsetting position in the underlying commodity. 
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)  do not have an offsetting position in the underlying commodity. 
C)  are concerned only with long-term price movements. 
D)  take a position in more than one commodity at a time.

Question 15

A company that hedges simply passes the risk on to someone else.

Accepted Answer

A) True 
 B)False

Question 16

Hedging may increase a company's debt capacity.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements is correct?

Accepted Answer

A)  Futures contracts and options contracts are economically similar, but vary in how they are traded. 
B)  Forward contracts and futures contracts are economically similar, but vary in how they are traded. 
C)  Forward contracts and options contracts are economically similar, but vary in how they are traded. 
D)  Forward contracts, futures contracts, and options contracts are all economically similar, but vary in how they are traded. 
A)  Futures contracts and options contracts are economically similar, but vary in how they are traded. 
B)  Forward contracts and futures contracts are economically similar, but vary in how they are traded. 
C)  Forward contracts and options contracts are economically similar, but vary in how they are traded. 
D)  Forward contracts, futures contracts, and options contracts are all economically similar, but vary in how they are traded.

Question 18

If you enter into an interest rate swap,the company taking the opposite side is called:

Accepted Answer

A)  The swap payer. 
B)  The swap counterparty. 
C)  The swap maker. 
D)  The off-taker. 
A)  The swap payer. 
B)  The swap counterparty. 
C)  The swap maker. 
D)  The off-taker.

Question 19

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 20

A contract to buy Japanese yen three months forward 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 Nasdaq Exchange. 
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 Nasdaq Exchange.

Exam 24: Risk Management

The derivatives market is characterized by:

Both the seller and the buyer in a futures contract are required to put up margin.

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

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

How might a firm such as General Mills protect itself against fluctuations in raw material prices for breakfast cereals?

Which one of the following is not correct concerning futures contracts?

Zeta Corp wishes to obtain a loan denominated in Swiss francs but the U.S.market offers better credit terms.What should Zeta do?

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

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

A speculator who sells a futures contract is betting that prices will _____ by the expiration of the contract.

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

A commodity producer who is worried about future prices can best hedge by:

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

A company that hedges simply passes the risk on to someone else.

Hedging may increase a company's debt capacity.

Which of the following statements is correct?

If you enter into an interest rate swap,the company taking the opposite side is called:

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?

A contract to buy Japanese yen three months forward at a price of ¥105/$ will:

Goals and Governance of the Firm

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 and Governance

Venture Capital, IPOs, and Seasoned Offerings

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers,Acquisitions,and Corporate Control

International Financial Management

Options

Filters