Question 1

Long-run financial risk:

Accepted Answer

A) can frequently be hedged on a permanent basis. 
B) is best hedged on a division by division basis within a conglomerate. 
C) is related more to near-term transactions than to advancements in technology. 
D) generally results from changes in the underlying economics of a business. 
E) can generally be hedged such that the financial viability of a firm is protected. 
A) can frequently be hedged on a permanent basis. 
B) is best hedged on a division by division basis within a conglomerate. 
C) is related more to near-term transactions than to advancements in technology. 
D) generally results from changes in the underlying economics of a business. 
E) can generally be hedged such that the financial viability of a firm is protected.

Question 2

A forward contract:

Accepted Answer

A) requires that payment be made in full when the contract is originated. 
B) provides the buyer with an option to buy an asset on the settlement date at the forward price. 
C) is a binding agreement on both the buyer and the seller and nets out as a zero sum game. 
D) is marked to the market daily at the seller's request. 
E) allows for immediate delivery at an agreed upon price which is to be paid on the settlement date. 
A) requires that payment be made in full when the contract is originated. 
B) provides the buyer with an option to buy an asset on the settlement date at the forward price. 
C) is a binding agreement on both the buyer and the seller and nets out as a zero sum game. 
D) is marked to the market daily at the seller's request. 
E) allows for immediate delivery at an agreed upon price which is to be paid on the settlement date.

Question 3

This morning a cereal maker agreed to pay a farmer $4.40 a bushel for 5,000 bushels of wheat that the farmer will ship to the factory four months from now.What is this legally binding agreement called?

Accepted Answer

A) forward contract 
B) spot contract 
C) swap 
D) exchange 
E) floating contract 
A) forward contract 
B) spot contract 
C) swap 
D) exchange 
E) floating contract

Question 4

Which one of the following is the primary difference between a swap contract and a forward contract?

Accepted Answer

A) underlying asset 
B) number of exchanges 
C) daily marking to the market 
D) option versus obligation 
E) time of payment 
A) underlying asset 
B) number of exchanges 
C) daily marking to the market 
D) option versus obligation 
E) time of payment

Question 5

How much will you pay to purchase five August 125 orange juice futures put option contracts?
Orange juice - 15,000 lbs:
U.S.cents per lb.

Accepted Answer

A) $1,200.00 
B) $2,362.50 
C) $4,162.50 
D) $6,637.50 
E) $6,750.00 
A) $1,200.00 
B) $2,362.50 
C) $4,162.50 
D) $6,637.50 
E) $6,750.00

Question 6

By definition,which one of the following contracts is marked to the market on a daily basis?

Accepted Answer

A) forward contract 
B) spot contract 
C) hedge 
D) swap 
E) futures contract 
A) forward contract 
B) spot contract 
C) hedge 
D) swap 
E) futures contract

Question 7

Which one of the following statements concerning option payoffs is correct?

Accepted Answer

A) The buyer of a call profits when the exercise price exceeds the market price. 
B) The buyer of a call profits when the strike price exceeds the exercise price. 
C) A put will only be exercised if both the seller and the buyer can profit. 
D) Both the buyer and the seller profit when a call is exercised. 
E) The seller of a put incurs a loss when a put is exercised. 
A) The buyer of a call profits when the exercise price exceeds the market price. 
B) The buyer of a call profits when the strike price exceeds the exercise price. 
C) A put will only be exercised if both the seller and the buyer can profit. 
D) Both the buyer and the seller profit when a call is exercised. 
E) The seller of a put incurs a loss when a put is exercised.

Question 8

What are the primary motives for a hedger and a speculator in the derivatives market?
 If a wheat farmer sells wheat futures,is that hedging or speculating?
 Explain.

Accepted Answer

The key is whether or not the contractin

Question 9

Suppose you purchase a September cocoa futures contract at the last price of the day as shown in the table below.What will be your profit or loss on this contract if the price turns out to be $1,707 per metric ton at expiration?
Futures:
Cocoa - 10 metric tons,$ per ton

Accepted Answer

A) $30 
B) $110 
C) $150 
D) $1,100 
E) $1,500 
A) $30 
B) $110 
C) $150 
D) $1,100 
E) $1,500

Question 10

A swap dealer in the U.S.:

Accepted Answer

A) acts solely as a seller of swap contracts. 
B) matches buyers to sellers. 
C) only deals if its book is matched. 
D) is frequently a commercial bank. 
E) trades electronically via NASDAQ. 
A) acts solely as a seller of swap contracts. 
B) matches buyers to sellers. 
C) only deals if its book is matched. 
D) is frequently a commercial bank. 
E) trades electronically via NASDAQ.

Question 11

A call option contract:

Accepted Answer

A) obligates both the buyer and the seller. 
B) obligates the buyer but not the seller. 
C) grants rights to the buyer and obligates the seller. 
D) grants rights to the seller and obligates the buyer. 
E) grants rights to both the buyer and the seller but does not obligate either party. 
A) obligates both the buyer and the seller. 
B) obligates the buyer but not the seller. 
C) grants rights to the buyer and obligates the seller. 
D) grants rights to the seller and obligates the buyer. 
E) grants rights to both the buyer and the seller but does not obligate either party.

Question 12

The value of a stock option is dependent upon the value of the underlying stock.Thus,a stock option is a:

Accepted Answer

A) forward agreement. 
B) derivative security. 
C) mezzanine asset. 
D) contingent security. 
E) junior security. 
A) forward agreement. 
B) derivative security. 
C) mezzanine asset. 
D) contingent security. 
E) junior security.

Question 13

What is the closing value on this day for one March futures contract on ethanol?
Ethanol - 32,000 U.S.gallons:
U.S.dollars and cents per gallon

Accepted Answer

A) $54,400 
B) $54,528 
C) $59,416 
D) $1.703 million 
E) $1.704 million 
A) $54,400 
B) $54,528 
C) $59,416 
D) $1.703 million 
E) $1.704 million

Question 14

Company A can borrow money at a fixed rate of 7.5 percent or a variable rate set at prime plus 0.5 percent.Company B can borrow money at a variable rate of prime plus 1 percent or a fixed rate of 7 percent.Company A prefers a fixed rate and company B prefers a variable rate.Given this information,which one of the following statements is correct?

Accepted Answer

A) Company A can swap with B and pay a fixed rate of 7.25 percent. 
B) If Company A swaps with B, Company A could pay a fixed rate of 6.5 percent. 
C) If Company B swaps with A, Company B must pay a fixed rate of 8 percent. 
D) Company B can swap with A such that Company B pays the variable prime rate. 
E) There are no terms under which both Company A and Company B can swap interest rates and both realize a profit. 
A) Company A can swap with B and pay a fixed rate of 7.25 percent. 
B) If Company A swaps with B, Company A could pay a fixed rate of 6.5 percent. 
C) If Company B swaps with A, Company B must pay a fixed rate of 8 percent. 
D) Company B can swap with A such that Company B pays the variable prime rate. 
E) There are no terms under which both Company A and Company B can swap interest rates and both realize a profit.

Question 15

Southern Groves raises tangerines.To hedge its risk,the firm trades in the orange futures market.This process is known as:

Accepted Answer

A) secondary trading. 
B) open trading. 
C) open-hedging. 
D) cross-hedging. 
E) perfect-hedging. 
A) secondary trading. 
B) open trading. 
C) open-hedging. 
D) cross-hedging. 
E) perfect-hedging.

Question 16

You purchased two May futures contracts on silver when the price quote was 10.420.Given today's closing prices as shown in the table,your total profit or loss to date is:
Silver - 5,000 troy oz.:
Dollars and cents per troy oz.

Accepted Answer

A) -$7,000 
B) -$3,500 
C) -$700 
D) -$350 
E) $70 
A) -$7,000 
B) -$3,500 
C) -$700 
D) -$350 
E) $70

Question 17

Farmer Ted planted 200 acres in wheat this year.The weather has been perfect and he expects to harvest a record crop within the next two weeks.At present,he has no storage facilities and therefore must sell his crop as soon as it is harvested.Which one of the following risks is he facing because he must sell his crop at whatever the market price is at harvest time?

Accepted Answer

A) futures risk 
B) volatility exposure 
C) surplus risk 
D) transactions exposure 
E) translation exposure 
A) futures risk 
B) volatility exposure 
C) surplus risk 
D) transactions exposure 
E) translation exposure

Question 18

A firm with a variable-rate loan wants to protect itself from increases in interest rates.Which of the following would interest this firm?
I.interest rate floor
II.interest rate cap
III.put option on an interest rate
IV.call option on an interest rate

Accepted Answer

A) I only 
B) I and III only 
C) I and IV only 
D) II and III only 
E) II and IV only 
A) I only 
B) I and III only 
C) I and IV only 
D) II and III only 
E) II and IV only

Question 19

Suppose a financial manager buys call options on 45,000 barrels of oil with an exercise price of $31 per barrel.She simultaneously sells a put option on 45,000 barrels of oil with the same exercise price of $31 per barrel.Her net profit per barrel is _____ if the price per barrel is $29 and _____ if the price per barrel is $35.

Accepted Answer

A) -$4; $2 
B) -$2; $0 
C) $0; -$2 
D) $0; $2 
E) -$2; $4 
A) -$4; $2 
B) -$2; $0 
C) $0; -$2 
D) $0; $2 
E) -$2; $4

Question 20

By hedging financial risk,a firm can:

Accepted Answer

A) ensure a steady rate of return for its shareholders. 
B) eliminate price changes over the long-term. 
C) ensure its own economic viability. 
D) gain time to adapt to changing market conditions. 
E) eliminate its exposure to price increases in raw materials. 
A) ensure a steady rate of return for its shareholders. 
B) eliminate price changes over the long-term. 
C) ensure its own economic viability. 
D) gain time to adapt to changing market conditions. 
E) eliminate its exposure to price increases in raw materials.

Exam 23: Enterprise Risk Management

Long-run financial risk:

A forward contract:

This morning a cereal maker agreed to pay a farmer $4.40 a bushel for 5,000 bushels of wheat that the farmer will ship to the factory four months from now.What is this legally binding agreement called?

Which one of the following is the primary difference between a swap contract and a forward contract?

How much will you pay to purchase five August 125 orange juice futures put option contracts? Orange juice - 15,000 lbs: U.S.cents per lb.

By definition,which one of the following contracts is marked to the market on a daily basis?

Which one of the following statements concerning option payoffs is correct?

What are the primary motives for a hedger and a speculator in the derivatives market? If a wheat farmer sells wheat futures,is that hedging or speculating? Explain.

Suppose you purchase a September cocoa futures contract at the last price of the day as shown in the table below.What will be your profit or loss on this contract if the price turns out to be $1,707 per metric ton at expiration? Futures: Cocoa - 10 metric tons,$ per ton

A swap dealer in the U.S.:

A call option contract:

The value of a stock option is dependent upon the value of the underlying stock.Thus,a stock option is a:

What is the closing value on this day for one March futures contract on ethanol? Ethanol - 32,000 U.S.gallons: U.S.dollars and cents per gallon

Southern Groves raises tangerines.To hedge its risk,the firm trades in the orange futures market.This process is known as:

You purchased two May futures contracts on silver when the price quote was 10.420.Given today's closing prices as shown in the table,your total profit or loss to date is: Silver - 5,000 troy oz.: Dollars and cents per troy oz.

A firm with a variable-rate loan wants to protect itself from increases in interest rates.Which of the following would interest this firm? I.interest rate floor II.interest rate cap III.put option on an interest rate IV.call option on an interest rate

By hedging financial risk,a firm can:

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working With Financial Statements

Long-Term Financial Planning and Growth

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Some Lessons From Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short-Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Behavioral Finance: Implications for Financial Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Leasing

Filters