Question 1

A firm can reduce 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

Selling a futures contract may be appropriate for someone 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 up. 
D)  have a ready market in which to sell a product. 
A)  lock in a future sales price. 
B)  lock in a future purchase price. 
C)  speculate that future spot prices are going up. 
D)  have a ready market in which to sell a product.

Question 3

In a typical interest rate swap the two parties will exchange a series of fixed payments for a series of payments that are linked to the level of interest rates.

Accepted Answer

A) True 
 B)False

Question 4

By using options a firm can (at a cost)protect against increases in raw material prices,while continuing to benefit from price decreases.

Accepted Answer

A) True 
 B)False

Question 5

In an interest rate swap,borrowers typically exchange fixed-rate payments in one currency for:

Accepted Answer

A)  fixed-rate payments in another currency. 
B)  variable-rate payments in another currency. 
C)  fixed-rate payments in the same currency. 
D)  variable-rate payments in the same currency. 
A)  fixed-rate payments in another currency. 
B)  variable-rate payments in another currency. 
C)  fixed-rate payments in the same currency. 
D)  variable-rate payments in the same currency.

Question 6

A derivatives contract:

Accepted Answer

A)  increases the risk of both the hedger and speculator. 
B)  increases the risk of the hedger and decreases the risk of the speculator. 
C)  reduces the risk of the hedger and increases the risk of the speculator. 
D)  reduces risk in both cases. 
A)  increases the risk of both the hedger and speculator. 
B)  increases the risk of the hedger and decreases the risk of the speculator. 
C)  reduces the risk of the hedger and increases the risk of the speculator. 
D)  reduces risk in both cases.

Question 7

Unless the corporation has reason to believe that the odds are stacked in its favor,it should use derivatives for speculation,not for hedging.

Accepted Answer

A) True 
 B)False

Question 8

The profit to the buyer of a futures contract is equal to the initial futures price minus the ultimate market price.

Accepted Answer

A) True 
 B)False

Question 9

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 10

Hershey's Chocolate is concerned about cocoa prices,which are currently $3,000 a ton.Analysts project that the cost of cocoa purchases could vary from $2,900 to $3,100 a ton.A September call option can be purchased with a $2,950 exercise price for $145.What is Hershey's worst-case scenario if it purchases these options?

Accepted Answer

A)  Cocoa prices will rise to $3,100 and Hershey is protected only to a price of $2,950. 
B)  Cocoa prices will not change from their current level and Hershey will have wasted the cost of the option. 
C)  Cocoa prices will not rise above Hershey's break-even price of $3,095, which equals the sum of the exercise price plus the cost of the option. 
D)  Cocoa prices will fall below $2,950 and Hershey will lose the $145 cost of the option. 
A)  Cocoa prices will rise to $3,100 and Hershey is protected only to a price of $2,950. 
B)  Cocoa prices will not change from their current level and Hershey will have wasted the cost of the option. 
C)  Cocoa prices will not rise above Hershey's break-even price of $3,095, which equals the sum of the exercise price plus the cost of the option. 
D)  Cocoa prices will fall below $2,950 and Hershey will lose the $145 cost of the option.

Question 11

Those who invest in derivative instruments that increase rather than reduce 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 12

The process of marking a futures contract to market means that:

Accepted Answer

A)  the profitability of the contract is locked in from the onset of the contract. 
B)  the amount of commodity to be delivered changes as prices change. 
C)  contracts are closed out as soon as they become unprofitable. 
D)  profits or losses are settled daily. 
A)  the profitability of the contract is locked in from the onset of the contract. 
B)  the amount of commodity to be delivered changes as prices change. 
C)  contracts are closed out as soon as they become unprofitable. 
D)  profits or losses are settled daily.

Question 13

Which one of the following is not correct concerning forward contracts? Forward contracts:

Accepted Answer

A)  are not standardized. 
B)  do not set the price until the end of the contract. 
C)  are not traded on organized exchanges. 
D)  are not marked to market daily. 
A)  are not standardized. 
B)  do not set the price until the end of the contract. 
C)  are not traded on organized exchanges. 
D)  are not marked to market daily.

Question 14

Which of the following strategies does not reduce risk?

Accepted Answer

A)  building flexibility into the firm's operations 
B)  increasing the proportion of the firm's costs that are fixed 
C)  taking out an insurance policy 
D)  hedging with derivative contracts 
A)  building flexibility into the firm's operations 
B)  increasing the proportion of the firm's costs that are fixed 
C)  taking out an insurance policy 
D)  hedging with derivative contracts

Question 15

The price for immediate delivery of a product is called the:

Accepted Answer

A)  spot price. 
B)  exercise price. 
C)  forward price. 
D)  the impact price. 
A)  spot price. 
B)  exercise price. 
C)  forward price. 
D)  the impact price.

Question 16

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 17

Futures contracts are custom-tailored forward contracts.

Accepted Answer

A) True 
 B)False

Question 18

Forward contracts are marked to market.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A)  a one-time currency exchange equal to the principal amount borrowed. 
B)  make payments to each other 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)  a one-time currency exchange equal to the principal amount borrowed. 
B)  make payments to each other 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

The most active trading in forward contracts is in:

Accepted Answer

A)  U.S. Treasury bills. 
B)  the Standard and Poor's index. 
C)  wheat crops. 
D)  foreign currencies. 
A)  U.S. Treasury bills. 
B)  the Standard and Poor's index. 
C)  wheat crops. 
D)  foreign currencies.

Exam 24: Risk Management

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

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

In a typical interest rate swap the two parties will exchange a series of fixed payments for a series of payments that are linked to the level of interest rates.

By using options a firm can (at a cost)protect against increases in raw material prices,while continuing to benefit from price decreases.

In an interest rate swap,borrowers typically exchange fixed-rate payments in one currency for:

A derivatives contract:

Unless the corporation has reason to believe that the odds are stacked in its favor,it should use derivatives for speculation,not for hedging.

The profit to the buyer of a futures contract is equal to the initial futures price minus the ultimate market price.

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

Those who invest in derivative instruments that increase rather than reduce risk are known as:

The process of marking a futures contract to market means that:

Which one of the following is not correct concerning forward contracts? Forward contracts:

Which of the following strategies does not reduce risk?

The price for immediate delivery of a product is called the:

Currency swaps are used to:

Futures contracts are custom-tailored forward contracts.

Forward contracts are marked to market.

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

The most active trading in forward contracts is in:

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

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