Question 1

The term derivatives refers to:

Accepted Answer

A)  forwards and futures. 
B)  swaps and options. 
C)  forwards, futures, swaps, and options. 
D)  forwards, futures, and swaps. 
A)  forwards and futures. 
B)  swaps and options. 
C)  forwards, futures, swaps, and options. 
D)  forwards, futures, and swaps.

Question 2

If you buy a forward contract,you agree to buy the product:

Accepted Answer

A)  at a later date at a price to be set in the future. 
B)  today at its current price. 
C)  at a later date at a price set today. 
D)  if and only if its price rises above its exercise price. 
A)  at a later date at a price to be set in the future. 
B)  today at its current price. 
C)  at a later date at a price set today. 
D)  if and only if its price rises above its exercise price.

Question 3

A futures contract calls for delivery of 60,000 pounds of soybean oil.What happens to the seller of a soybean oil futures contract at 41 cents per pound if the futures price closes the next day at 42 cents per pound?

Accepted Answer

A)  The contract is marked to market with a $600 loss. 
B)  The contract is marked to market with a $600 gain. 
C)  Futures contracts are voided if the price increases prior to expiration. 
D)  Nothing happens until the expiration of the contract. 
A)  The contract is marked to market with a $600 loss. 
B)  The contract is marked to market with a $600 gain. 
C)  Futures contracts are voided if the price increases prior to expiration. 
D)  Nothing happens until the expiration of the contract.

Question 4

A milling company buys a futures contract that requires it to take delivery of 5,000 bushels of wheat at a price of $6.80 per bushel.At expiration the spot price of wheat is $6.68 per bushel.The miller:

Accepted Answer

A)  has saved $0.12 per bushel through hedging. 
B)  has locked in an effective price of $6.80 per bushel. 
C)  can choose not to take delivery since the price declined. 
D)  has locked in an effective price of $6.68 per bushel. 
A)  has saved $0.12 per bushel through hedging. 
B)  has locked in an effective price of $6.80 per bushel. 
C)  can choose not to take delivery since the price declined. 
D)  has locked in an effective price of $6.68 per bushel.

Question 5

Which one of the following futures contract holders is speculating?

Accepted Answer

A)  A wheat farmer who sells wheat futures 
B)  A cattle rancher who buys live cattle futures 
C)  A candy maker who buys sugar futures 
D)  An oil producer who sells crude oil futures 
A)  A wheat farmer who sells wheat futures 
B)  A cattle rancher who buys live cattle futures 
C)  A candy maker who buys sugar futures 
D)  An oil producer who sells crude oil futures

Question 6

Buyers of financial futures place an order to buy a financial asset at a future date.

Accepted Answer

A) True 
 B)False

Question 7

Which one of the following would not be regulated in a standardized futures contract?

Accepted Answer

A)  Quantity of asset to be traded 
B)  Quality of asset to be traded 
C)  The spot price 
D)  Date of settlement 
A)  Quantity of asset to be traded 
B)  Quality of asset to be traded 
C)  The spot price 
D)  Date of settlement

Question 8

If you sell a forward contract,you agree to:

Accepted Answer

A)  deliver a product at a later date for a price set today. 
B)  receive a product at a later date at the price on that later date. 
C)  receive a product at a later date for a price set today. 
D)  deliver a product at a later date for a price set on that later date. 
A)  deliver a product at a later date for a price set today. 
B)  receive a product at a later date at the price on that later date. 
C)  receive a product at a later date for a price set today. 
D)  deliver a product at a later date for a price set on that later date.

Question 9

The buyer of a credit default swap:

Accepted Answer

A)  gains protection against a fall in house prices. 
B)  gains protection against default by a pension scheme. 
C)  insures the seller against a fall in house prices. 
D)  gains insurance against default on a bond. 
A)  gains protection against a fall in house prices. 
B)  gains protection against default by a pension scheme. 
C)  insures the seller against a fall in house prices. 
D)  gains insurance against default on a bond.

Question 10

What happens to the price of a futures contract as expiration draws closer?

Accepted Answer

A)  The futures price exceeds the spot price of the asset. 
B)  The futures price is exceeded by the spot price of the asset. 
C)  The futures price approaches the spot price of the asset. 
D)  There is no relationship between the futures price and spot price as the contract approaches expiration. 
A)  The futures price exceeds the spot price of the asset. 
B)  The futures price is exceeded by the spot price of the asset. 
C)  The futures price approaches the spot price of the asset. 
D)  There is no relationship between the futures price and spot price as the contract approaches expiration.

Question 11

ABC Corp.borrows $5 million at 10% from a bank and swaps this loan for a 12% yen loan.The spot exchange rate is JPY105 = USD1.How much does ABC pay annually to the bank?

Accepted Answer

A)  ¥1.26 million 
B)  ¥5.71 million 
C)  ¥52.50 million 
D)  ¥63.00 million 
A)  ¥1.26 million 
B)  ¥5.71 million 
C)  ¥52.50 million 
D)  ¥63.00 million

Question 12

Swap contracts can be based on either interest rates or currencies.

Accepted Answer

A) True 
 B)False

Question 13

Mexico purchased call options to lock in the price of its oil and create a base floor for its revenue stream.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following contracts is not a financial future?

Accepted Answer

A)  eurodollar deposit futures 
B)  yen futures 
C)  orange juice futures 
D)  Standard & Poor's futures 
A)  eurodollar deposit futures 
B)  yen futures 
C)  orange juice futures 
D)  Standard & Poor's futures

Question 15

A commodity producer that uses put options to reduce the risk of a fall in commodity prices is effectively buying insurance.

Accepted Answer

A) True 
 B)False

Question 16

When a commodity futures reaches its expiration,the seller usually:

Accepted Answer

A)  delivers the commodity to the futures buyer. 
B)  delivers the commodity to the futures exchange. 
C)  takes an offsetting futures position and settles in cash. 
D)  adds the profit or loss to his margin account and continues to trade. 
A)  delivers the commodity to the futures buyer. 
B)  delivers the commodity to the futures exchange. 
C)  takes an offsetting futures position and settles in cash. 
D)  adds the profit or loss to his margin account and continues to trade.

Question 17

Which one of the following is the major difference between forward and futures contracts?

Accepted Answer

A)  Futures contracts are more expensive than forward contracts. 
B)  Forward contracts are traded on the forward exchanges. 
C)  Futures contracts are always delivered. 
D)  Forward contracts are not marked to market. 
A)  Futures contracts are more expensive than forward contracts. 
B)  Forward contracts are traded on the forward exchanges. 
C)  Futures contracts are always delivered. 
D)  Forward contracts are not marked to market.

Question 18

The activities of speculators are necessary in the futures markets in order to:

Accepted Answer

A)  prevent hedgers from trading options. 
B)  provide a continual stream of profit to hedgers. 
C)  help ensure futures prices are fair value. 
D)  understand the direction of future price changes. 
A)  prevent hedgers from trading options. 
B)  provide a continual stream of profit to hedgers. 
C)  help ensure futures prices are fair value. 
D)  understand the direction of future price changes.

Question 19

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

Accepted Answer

A)  decrease 
B)  increase 
C)  remain constant 
D)  guarantee high profits 
A)  decrease 
B)  increase 
C)  remain constant 
D)  guarantee high profits

Question 20

The majority of large companies use derivatives in some way to manage their risk.

Accepted Answer

A) True 
 B)False

Exam 24: Risk Management

The term derivatives refers to:

If you buy a forward contract,you agree to buy the product:

A futures contract calls for delivery of 60,000 pounds of soybean oil.What happens to the seller of a soybean oil futures contract at 41 cents per pound if the futures price closes the next day at 42 cents per pound?

A milling company buys a futures contract that requires it to take delivery of 5,000 bushels of wheat at a price of $6.80 per bushel.At expiration the spot price of wheat is $6.68 per bushel.The miller:

Which one of the following futures contract holders is speculating?

Buyers of financial futures place an order to buy a financial asset at a future date.

Which one of the following would not be regulated in a standardized futures contract?

If you sell a forward contract,you agree to:

The buyer of a credit default swap:

What happens to the price of a futures contract as expiration draws closer?

ABC Corp.borrows $5 million at 10% from a bank and swaps this loan for a 12% yen loan.The spot exchange rate is JPY105 = USD1.How much does ABC pay annually to the bank?

Swap contracts can be based on either interest rates or currencies.

Mexico purchased call options to lock in the price of its oil and create a base floor for its revenue stream.

Which of the following contracts is not a financial future?

A commodity producer that uses put options to reduce the risk of a fall in commodity prices is effectively buying insurance.

When a commodity futures reaches its expiration,the seller usually:

Which one of the following is the major difference between forward and futures contracts?

The activities of speculators are necessary in the futures markets in order to:

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

The majority of large companies use derivatives in some way to manage their risk.

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