Question 1

A firm might enter a swap contract whereby it agrees to make a series of regular payments in one currency in return for receiving a series of payments in another currency.

Accepted Answer

A) True 
 B)False

Question 2

A farmer can hedge the risk of downward movement in the price of his product by:

Accepted Answer

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

Question 3

Which one of the following is not true of the financial futures markets?

Accepted Answer

A)  Financial futures trade on the Chicago Mercantile Exchange. 
B)  When many financial future mature, the seller cannot deliver the asset to the buyer. 
C)  A major use of financial futures is protection from interest rate risk. 
D)  Trading in financial futures is significantly less than trading in financial futures. 
A)  Financial futures trade on the Chicago Mercantile Exchange. 
B)  When many financial future mature, the seller cannot deliver the asset to the buyer. 
C)  A major use of financial futures is protection from interest rate risk. 
D)  Trading in financial futures is significantly less than trading in financial futures.

Question 4

Companies should always leave investors to hedge for themselves.

Accepted Answer

A) True 
 B)False

Question 5

A clothes producer hedges its future cotton purchases by buying cotton futures.The futures contract provides the producer with 50,000 pounds of cotton at a price of $0.80 per pound.By contract expiration the producer finds that cotton prices have declined to $0.73 per pound.As a result of the futures contracts,the producer will:

Accepted Answer

A)  lose $3,500 per contract in the futures market which offsets gains in the cash market. 
B)  gain $3,500 per contract in the futures market which offsets losses in the cash market. 
C)  lose $3,500 per contract in the futures market and suffer an opportunity cost in the cash market. 
D)  gain $3,500 per contract in the futures market and gain $0.07 per pound in the cash market. 
A)  lose $3,500 per contract in the futures market which offsets gains in the cash market. 
B)  gain $3,500 per contract in the futures market which offsets losses in the cash market. 
C)  lose $3,500 per contract in the futures market and suffer an opportunity cost in the cash market. 
D)  gain $3,500 per contract in the futures market and gain $0.07 per pound in the cash market.

Question 6

You enter into a forward contract to take delivery of 1 million euros 3 months from now.What happens to the price you will pay at expiration if the euro depreciates during the contract period?

Accepted Answer

A)  Your price will increase. 
B)  Your price will decrease. 
C)  Your price was fixed at the onset of the contract. 
D)  Your price was fixed but you will receive correspondingly more euros due to the depreciation. 
A)  Your price will increase. 
B)  Your price will decrease. 
C)  Your price was fixed at the onset of the contract. 
D)  Your price was fixed but you will receive correspondingly more euros due to the depreciation.

Question 7

A sensible corporate risk strategy needs answers to three of these questions.Which is the odd man out?

Accepted Answer

A)  What are the major risks that the company faces? 
B)  Is the company being paid for taking these risks? 
C)  Can we spot any mispriced derivative contracts? 
D)  Can the company reduce the probability of a bad outcome? 
A)  What are the major risks that the company faces? 
B)  Is the company being paid for taking these risks? 
C)  Can we spot any mispriced derivative contracts? 
D)  Can the company reduce the probability of a bad outcome?

Question 8

A futures contract seller is obligated to deliver 5,000 bushels of soybeans for $12.00 per bushel at expiration.If soybean futures close at $12.10 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 $12.00. 
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 $12.00. 
D)  will receive a check for $500 from the buyer of the contract.

Question 9

Futures contracts are standardized to expire on the same day each year.

Accepted Answer

A) True 
 B)False

Question 10

One distinguishing difference between the buyer of a futures contract and the buyer of an option contract is that the futures buyer:

Accepted Answer

A)  pays a much higher up-front price than option buyers. 
B)  has an obligation to purchase, not a choice. 
C)  can lose no more than the initial outlay. 
D)  has increased rather than reduced risk. 
A)  pays a much higher up-front price than option buyers. 
B)  has an obligation to purchase, not a choice. 
C)  can lose no more than the initial outlay. 
D)  has increased rather than reduced risk.

Question 11

In general,when deciding whether one 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 12

A swap is an arrangement by two counterparties to exchange one stream of cash flows for another.

Accepted Answer

A) True 
 B)False

Question 13

The primary purpose of financial futures is to:

Accepted Answer

A)  benefit from increases in interest rates. 
B)  protect against swings in interest rates or prices of financial assets. 
C)  translate one currency into another. 
D)  guarantee the repayment of loan principal. 
A)  benefit from increases in interest rates. 
B)  protect against swings in interest rates or prices of financial assets. 
C)  translate one currency into another. 
D)  guarantee the repayment of loan principal.

Question 14

If there is an excess of market participants who want to buy the futures as a hedge,then:

Accepted Answer

A)  speculators will come into the market to sell the futures. 
B)  speculators will see a potential profit from also buying the futures. 
C)  speculators will steer clear of the futures market. 
D)  the market may have to close down until there is a balance of supply and demand. 
A)  speculators will come into the market to sell the futures. 
B)  speculators will see a potential profit from also buying the futures. 
C)  speculators will steer clear of the futures market. 
D)  the market may have to close down until there is a balance of supply and demand.

Question 15

Which of these statements is not true?

Accepted Answer

A)  Transactions to reduce risk are unlikely to add value if investors can easily undertake similar transactions. 
B)  Hedging may reduce the costs of financial distress. 
C)  Transactions to reduce risk always add value. 
D)  Hedging is a zero-sum game. 
A)  Transactions to reduce risk are unlikely to add value if investors can easily undertake similar transactions. 
B)  Hedging may reduce the costs of financial distress. 
C)  Transactions to reduce risk always add value. 
D)  Hedging is a zero-sum game.

Question 16

Investors can hedge against a change in house prices by purchasing real estate futures contracts.

Accepted Answer

A) True 
 B)False

Question 17

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 simultaneously. 
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 simultaneously. 
C)  provide a cushion for the exchange against defaults on the contract. 
D)  hold interest payments until expiration.

Question 18

What has happened to cause a $250 loss to be marked to the margin account of a futures contract buyer?

Accepted Answer

A)  The commodity futures price decreased on that day. 
B)  The commodity futures price increased on that day. 
C)  The commodity spot price decreased on that day. 
D)  The commodity spot price increased on that day. 
A)  The commodity futures price decreased on that day. 
B)  The commodity futures price increased on that day. 
C)  The commodity spot price decreased on that day. 
D)  The commodity spot price increased on that day.

Question 19

At the expiration of a futures contract,the futures price will be:

Accepted Answer

A)  greater than the spot price. 
B)  equal to the spot price. 
C)  less than the spot price. 
D)  greater than the forward price. 
A)  greater than the spot price. 
B)  equal to the spot price. 
C)  less than the spot price. 
D)  greater than the forward price.

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 24: Risk Management

A firm might enter a swap contract whereby it agrees to make a series of regular payments in one currency in return for receiving a series of payments in another currency.

A farmer can hedge the risk of downward movement in the price of his product by:

Which one of the following is not true of the financial futures markets?

Companies should always leave investors to hedge for themselves.

You enter into a forward contract to take delivery of 1 million euros 3 months from now.What happens to the price you will pay at expiration if the euro depreciates during the contract period?

A sensible corporate risk strategy needs answers to three of these questions.Which is the odd man out?

A futures contract seller is obligated to deliver 5,000 bushels of soybeans for $12.00 per bushel at expiration.If soybean futures close at $12.10 the next day,the seller:

Futures contracts are standardized to expire on the same day each year.

One distinguishing difference between the buyer of a futures contract and the buyer of an option contract is that the futures buyer:

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

A swap is an arrangement by two counterparties to exchange one stream of cash flows for another.

The primary purpose of financial futures is to:

If there is an excess of market participants who want to buy the futures as a hedge,then:

Which of these statements is not true?

Investors can hedge against a change in house prices by purchasing real estate futures contracts.

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

What has happened to cause a $250 loss to be marked to the margin account of a futures contract buyer?

At the expiration of a futures contract,the futures price will be:

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

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