Question 1

Which of the following statements is FALSE?

Accepted Answer

A) The most common method firms use to reduce the risk that results from changes in exchange rates is to hedge the transaction using currency forward contracts. 
B) Fluctuating exchanges rates cause a problem known as the importer-exporter dilemma for firms doing business in international markets. 
C) Exchange rate risk naturally arises whenever transacting parties use different currencies: Both of the parties will be at risk if exchange rates fluctuate. 
D) Because the supply and demand for currencies varies with global economic conditions,exchange rates are volatile. 
A) The most common method firms use to reduce the risk that results from changes in exchange rates is to hedge the transaction using currency forward contracts. 
B) Fluctuating exchanges rates cause a problem known as the importer-exporter dilemma for firms doing business in international markets. 
C) Exchange rate risk naturally arises whenever transacting parties use different currencies: Both of the parties will be at risk if exchange rates fluctuate. 
D) Because the supply and demand for currencies varies with global economic conditions,exchange rates are volatile.

Question 2

Which of the following statements regarding futures contracts is FALSE?

Accepted Answer

A) Both the buyer and the seller can get out of the contract at any time by selling it to a third party at the current market price. 
B) Futures prices are not prices that are paid today.Rather,they are prices agreed to today,to be paid in the future. 
C) Futures contracts are traded anonymously on an exchange at a publicly observed market price and are generally very illiquid. 
D) Traders are required to post collateral,called margin,when buying or selling commodities using futures contracts. 
A) Both the buyer and the seller can get out of the contract at any time by selling it to a third party at the current market price. 
B) Futures prices are not prices that are paid today.Rather,they are prices agreed to today,to be paid in the future. 
C) Futures contracts are traded anonymously on an exchange at a publicly observed market price and are generally very illiquid. 
D) Traders are required to post collateral,called margin,when buying or selling commodities using futures contracts.

Question 3

In June 2016,the spot exchange rate for the British Pound was $1.4255/£ .Suppose that at the same time Luther Industries entered into a contract to purchase goods with a price of £400,000 to be delivered in one year.There is a one-year option call contract available to Luther which will allow the company to purchase £10,000 for $1.50/£.If Luther purchases 40 option contracts,and the spot rate at the time the contract is due is $1.8725/£,how much will Luther pay for the goods?

Accepted Answer

A) $570,200.00 
B) $266,666.70 
C) $600,000.00 
D) $749,000.00 
A) $570,200.00 
B) $266,666.70 
C) $600,000.00 
D) $749,000.00

Question 4

If your firm is fully insured,the NPV of implementing the new safety policies is closest to:

Accepted Answer

A) $2.15 million 
B) $2.5 million 
C) $2.25 million 
D) -$.25 million 
A) $2.15 million 
B) $2.5 million 
C) $2.25 million 
D) -$.25 million

Question 5

In June 2016,the spot exchange rate for the British Pound was $1.4255/£ .Suppose that at the same time Luther Industries entered into a contract to purchase goods with a price of £400,000 to be delivered in one year.There is a one-year call option contract available to Luther which will allow the company to purchase £10,000 for $1.50/£.If Luther purchases 40 option contracts,and the spot rate at the time the contract is due is $1.3465/£,how much will Luther pay for the goods?

Accepted Answer

A) $570,200.00 
B) $538,600.00 
C) $600,000.00 
D) $749,000.00 
A) $570,200.00 
B) $538,600.00 
C) $600,000.00 
D) $749,000.00

Question 6

Use the information for the question(s)below.
Your firm faces an 8% chance of a potential loss of $50 million next year.If your firm implements new safety policies,it can reduce the chance of this loss to 3%,but the new safety policies have an upfront cost of $250,000.Suppose that the beta of the loss is 0 and the risk-free rate of interest is 5%.
-If your firm is uninsured,the NPV of implementing the new safety policies is closest to:

Accepted Answer

A) $2.25 million 
B) -$.25 million 
C) $2.5 million 
D) $2.15 million 
A) $2.25 million 
B) -$.25 million 
C) $2.5 million 
D) $2.15 million

Question 7

Farmville Industries is a major agricultural firm and is concerned about the possibility of drought impacting corn production.In the event of a drought,Farmville Industries anticipates a loss of $75 million.Suppose the likelihood of a drought is 10% per year,and the beta associated with such a loss is 0.4.If the risk-free interest rate is 5% and the expected return on the market is 10%,then what is the actuarially fair insurance premium?

Accepted Answer

The expected loss = $75 million × .10 =

Question 8

Which of the following statements is FALSE?

Accepted Answer

A) The covered interest parity equation states that the difference between the forward and spot exchange rates is related to the interest rate differential between the currencies. 
B) By entering into a currency forward contract,a firm can lock in an exchange rate in advance and reduce or eliminate its exposure to fluctuations in a currency's value. 
C) When the interest rate differs across countries,investors have an incentive to borrow in the low-interest rate currency and invest in the high interest rate currency. 
D) A currency forward is usually written between two firms,and it fixes a currency exchange rate for a transaction that will occur at a future date. 
A) The covered interest parity equation states that the difference between the forward and spot exchange rates is related to the interest rate differential between the currencies. 
B) By entering into a currency forward contract,a firm can lock in an exchange rate in advance and reduce or eliminate its exposure to fluctuations in a currency's value. 
C) When the interest rate differs across countries,investors have an incentive to borrow in the low-interest rate currency and invest in the high interest rate currency. 
D) A currency forward is usually written between two firms,and it fixes a currency exchange rate for a transaction that will occur at a future date.

Question 9

Which of the following statements regarding currency options is FALSE?

Accepted Answer

A) Firms often prefer forward contracts to currency options if the transaction they are hedging might not take place. 
B) Currency options are another method that firms commonly use to manage exchange rate risk.Currency options,like stock options,give the holder the right-but not the obligation-to exchange currency at a given exchange rate. 
C) Currency forward contracts allow firms to lock in a future exchange rate;currency options allow firms to insure themselves against the exchange rate moving beyond a certain level. 
D) Many managers want the firm to benefit if the exchange rate moves in their favor,rather than being stuck paying an above-market rate. 
A) Firms often prefer forward contracts to currency options if the transaction they are hedging might not take place. 
B) Currency options are another method that firms commonly use to manage exchange rate risk.Currency options,like stock options,give the holder the right-but not the obligation-to exchange currency at a given exchange rate. 
C) Currency forward contracts allow firms to lock in a future exchange rate;currency options allow firms to insure themselves against the exchange rate moving beyond a certain level. 
D) Many managers want the firm to benefit if the exchange rate moves in their favor,rather than being stuck paying an above-market rate.

Question 10

The risk that the firm will not have,or be able to raise,the cash required to meet the margin calls on its hedges is called:

Accepted Answer

A) liquidity risk. 
B) basis risk. 
C) commodity price risk. 
D) speculation risk. 
A) liquidity risk. 
B) basis risk. 
C) commodity price risk. 
D) speculation risk.

Question 11

In December 2005,the spot exchange rate for the British Pound was $1.7188/£ and the one-year forward rate was $1.8675/£.Suppose that at the same time Luther Industries entered into a contract to purchase goods with a price of £375,000 to be delivered in one year.Simultaneously Luther entered into a one-year forward contract to purchase £375,000.What is the amount of the payment in U.S.dollars that Luther Industries will have to make in one year to pay for their goods?

Accepted Answer

Since Luther entered into a fo

Question 12

To protect the firm against the loss of earnings if the business operations are disrupted due to fire,accident,or some other insured peril a firm would purchase:

Accepted Answer

A) property insurance. 
B) key personnel insurance. 
C) business liability insurance. 
D) business interruption insurance. 
A) property insurance. 
B) key personnel insurance. 
C) business liability insurance. 
D) business interruption insurance.

Question 13

Like most foreign exchange rates,the dollar/euro rate is a floating rate,which means it changes constantly depending on the quantity supplied and demanded for each currency in the market.The supply and demand for each currency is driven directly by all of the following factors EXCEPT:

Accepted Answer

A) relative inflation. 
B) firms trading goods. 
C) investors trading securities. 
D) the actions of central banks in each country. 
A) relative inflation. 
B) firms trading goods. 
C) investors trading securities. 
D) the actions of central banks in each country.

Question 14

In December 2005,the spot exchange rate for the British Pound was $1.7188/£.Suppose that at the same time the one-year interest rate in the United States was 4.85% and the one-year interest rate in Great Britain was 3.15%.Based on these rates,what forward exchange rate is consistent with no arbitrage?

Accepted Answer

A) $1.6909/£ 
B) $1.7471/£ 
C) $1.1163/£ 
D) $2.6464/£ 
A) $1.6909/£ 
B) $1.7471/£ 
C) $1.1163/£ 
D) $2.6464/£

Question 15

Which of the following statements is FALSE?

Accepted Answer

A) Currency options allow firms to lock in a future exchange rate;currency forward contracts allow firms to insure themselves against the exchange rate moving beyond a certain level. 
B) Generally speaking,cash-and-carry strategies are used primarily by large banks,which can borrow easily and face low transaction costs. 
C) Currency options,like stock options,give the holder the right-but not the obligation-to exchange currency at a given exchange rate. 
D) Many managers want the firm to benefit if the exchange rate moves in their favor,rather than being stuck paying an above-market rate. 
A) Currency options allow firms to lock in a future exchange rate;currency forward contracts allow firms to insure themselves against the exchange rate moving beyond a certain level. 
B) Generally speaking,cash-and-carry strategies are used primarily by large banks,which can borrow easily and face low transaction costs. 
C) Currency options,like stock options,give the holder the right-but not the obligation-to exchange currency at a given exchange rate. 
D) Many managers want the firm to benefit if the exchange rate moves in their favor,rather than being stuck paying an above-market rate.

Question 16

In December 2005,the spot exchange rate for the British Pound was $1.7188/£.Suppose that at the same time the one-year interest rate in the United States was 4.85% and the one-year interest rate in Great Britain was 3.15%.Based on these rates,what forward exchange rate is consistent with no arbitrage.

Accepted Answer

F = S × @#IMG-DLM&

Question 17

The risk that arises because the value of the futures contract will not be perfectly correlated with the firm's exposure is called:

Accepted Answer

A) commodity price risk. 
B) basis risk. 
C) liquidity risk. 
D) speculation risk. 
A) commodity price risk. 
B) basis risk. 
C) liquidity risk. 
D) speculation risk.

Question 18

What is the actuarially fair cost of full insurance?

Accepted Answer

Insurance Premium =

Question 19

Because of a new program called Kash for Klunkers,SFTSL experiences a rash of auto loan prepayments,reducing the size of the auto loan portfolio from $200 million to $100 million and increasing the cash reserves to $200 million.After these prepayments,the duration of SFTSL's equity is closest to:

Accepted Answer

A) 6 years 
B) 8 years 
C) 10 years 
D) 14 years 
A) 6 years 
B) 8 years 
C) 10 years 
D) 14 years

Question 20

What are some of the disadvantages of long-term supply contracts?

Accepted Answer

Such contracts have several potential di

Exam 30: Risk Management

Which of the following statements is FALSE?

Which of the following statements regarding futures contracts is FALSE?

If your firm is fully insured,the NPV of implementing the new safety policies is closest to:

Which of the following statements is FALSE?

Which of the following statements regarding currency options is FALSE?

The risk that the firm will not have,or be able to raise,the cash required to meet the margin calls on its hedges is called:

To protect the firm against the loss of earnings if the business operations are disrupted due to fire,accident,or some other insured peril a firm would purchase:

Like most foreign exchange rates,the dollar/euro rate is a floating rate,which means it changes constantly depending on the quantity supplied and demanded for each currency in the market.The supply and demand for each currency is driven directly by all of the following factors EXCEPT:

Which of the following statements is FALSE?

The risk that arises because the value of the futures contract will not be perfectly correlated with the firm's exposure is called:

What is the actuarially fair cost of full insurance?

Because of a new program called Kash for Klunkers,SFTSL experiences a rash of auto loan prepayments,reducing the size of the auto loan portfolio from $200 million to $100 million and increasing the cash reserves to $200 million.After these prepayments,the duration of SFTSL's equity is closest to:

What are some of the disadvantages of long-term supply contracts?

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

International Corporate Finance

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