Question 1

There are always at least ________ counterparties in a credit default swap.

Accepted Answer

A) 0 
B) 1 
C) 2 
D) 3 
E) more than three 
A) 0 
B) 1 
C) 2 
D) 3 
E) more than three

Question 2

Last week,you sold a futures contract on 5,000 troy ounces of silver at a settle price of $16.59.Today,you made delivery and the daily settle price was $16.62.What amount will you receive at the time of delivery? Assume yesterday's settle price was $16.66.

Accepted Answer

A) $82,950 
B) −$200 
C) $300 
D) $83,100 
E) $83,300 
A) $82,950 
B) −$200 
C) $300 
D) $83,100 
E) $83,300

Question 3

Assume the futures contracts on silver are quoted in dollars per troy ounce with a contract size of 5,000 troy ounces.Contract quotes for the day included an open value of $16.650,a high of $16.660,a low of $16.620,and a settle of $16.645.If you purchased three contracts at the closing price what was the dollar cost of your purchase ignoring all transaction costs?

Accepted Answer

A) $83,250 
B) $82,500 
C) $249,675 
D) $249,750 
E) $83,225 
A) $83,250 
B) $82,500 
C) $249,675 
D) $249,750 
E) $83,225

Question 4

When interest rates shift,the price of zero coupon bonds are ________ volatile ________

Accepted Answer

A) more; if they have a short maturity rather than a long maturity. 
B) not; because their duration always matches their maturity. 
C) equally; regardless of their maturity. 
D) less; than coupon bonds of the same maturity. 
E) more; than coupon bonds of the same maturity. 
A) more; if they have a short maturity rather than a long maturity. 
B) not; because their duration always matches their maturity. 
C) equally; regardless of their maturity. 
D) less; than coupon bonds of the same maturity. 
E) more; than coupon bonds of the same maturity.

Question 5

A financial institution has equity equal to one-tenth of its assets.If its asset duration is currently equal to its liability duration,then to immunize,the firm needs to:

Accepted Answer

A) decrease the duration of its assets. 
B) increase the duration of its assets. 
C) decrease the duration of its liabilities. 
D) maintain the equal durations. 
E) increase either the duration of its assets or of its liabilities. 
A) decrease the duration of its assets. 
B) increase the duration of its assets. 
C) decrease the duration of its liabilities. 
D) maintain the equal durations. 
E) increase either the duration of its assets or of its liabilities.

Question 6

Assume a bank has a $25 million mortgage bond risk position which it hedges in the Treasury bond futures market.Approximately how many futures contracts would be needed for this hedge if you assumed mortgage bonds and Treasury bonds were perfectly correlated?

Accepted Answer

A) 5 
B) 25 
C) 250 
D) 500 
E) 2,500 
A) 5 
B) 25 
C) 250 
D) 500 
E) 2,500

Question 7

The party most apt to take a long position in agriculture futures is the firm that:

Accepted Answer

A) harvests lumber. 
B) raises corn. 
C) harvests cotton. 
D) uses cocoa to make candy. 
E) supplies pigs to slaughter houses. 
A) harvests lumber. 
B) raises corn. 
C) harvests cotton. 
D) uses cocoa to make candy. 
E) supplies pigs to slaughter houses.

Question 8

Derivatives can be used to either hedge or speculate.These strategies:

Accepted Answer

A) increase risk in both cases. 
B) decrease risk in both cases. 
C) spread or minimize risk in both cases. 
D) offset risk by hedging and increase risk by speculating. 
E) offset risks by speculating and increase risk by hedging. 
A) increase risk in both cases. 
B) decrease risk in both cases. 
C) spread or minimize risk in both cases. 
D) offset risk by hedging and increase risk by speculating. 
E) offset risks by speculating and increase risk by hedging.

Question 9

To protect against interest rate risk,the mortgage banker who has committed to lending funds but has yet to raise those funds should:

Accepted Answer

A) buy futures,as this position will hedge losses if rates rise. 
B) sell futures,as this position will hedge losses if rates rise. 
C) sell futures,as this position will add to his gains if rates rise. 
D) buy futures,as this position will add to his gains if rates rise. 
E) avoid the futures market. 
A) buy futures,as this position will hedge losses if rates rise. 
B) sell futures,as this position will hedge losses if rates rise. 
C) sell futures,as this position will add to his gains if rates rise. 
D) buy futures,as this position will add to his gains if rates rise. 
E) avoid the futures market.

Question 10

LIBOR stands for:

Accepted Answer

A) London Interest Basis Offered Rate. 
B) London International Offered Rate. 
C) London Interbank Offered Rate. 
D) London Interagency Offered Rate. 
E) London International Option Rate. 
A) London Interest Basis Offered Rate. 
B) London International Offered Rate. 
C) London Interbank Offered Rate. 
D) London Interagency Offered Rate. 
E) London International Option Rate.

Question 11

You have gathered the following market value and duration information on Northern Bank:   What new asset duration will immunize the balance sheet?

Accepted Answer

A) 1.22 years 
B) .99 years 
C) 1.36 years 
D) 1.48 years 
E) 1.13 years 
A) 1.22 years 
B) .99 years 
C) 1.36 years 
D) 1.48 years 
E) 1.13 years

Question 12

A potential disadvantage of forward contracts versus futures contracts is:

Accepted Answer

A) the extra liquidity required to cover the potential outflows that can occur prior to delivery. 
B) the higher incentive for a particular party to default. 
C) that the buyers and sellers don't know each other and never meet. 
D) the obligatory requirements rather than the optional opportunities. 
E) the increased ability to close out a position prior to expiration. 
A) the extra liquidity required to cover the potential outflows that can occur prior to delivery. 
B) the higher incentive for a particular party to default. 
C) that the buyers and sellers don't know each other and never meet. 
D) the obligatory requirements rather than the optional opportunities. 
E) the increased ability to close out a position prior to expiration.

Question 13

You bought a futures contract on corn for $3.55 per bushel and closed the contract five days later at $3.56.The daily closing prices were $3.57,$3.54,$3.53,$3.58,and $3.56.What was the mark-to-market sequence of payments per bushel from (+)and to (−)the clearing house?

Accepted Answer

A) +$.02,−.03,−.01,+.05,−.02 
B) +$.01,−.03,−.01,+.05,−.02 
C) +$.02,+.01,−.02,−.06,+.04 
D) −$.02,+.03,+.01,−.05,+.02 
E) −$.01,+.03,+.01,−.05,+.02 
A) +$.02,−.03,−.01,+.05,−.02 
B) +$.01,−.03,−.01,+.05,−.02 
C) +$.02,+.01,−.02,−.06,+.04 
D) −$.02,+.03,+.01,−.05,+.02 
E) −$.01,+.03,+.01,−.05,+.02

Question 14

Interest rate swaps allow one party to exchange a:

Accepted Answer

A) floating interest rate for a fixed rate. 
B) fixed interest rate for a lower fixed rate. 
C) floating interest rate for a lower floating rate. 
D) floating interest rate for a one-time immediate cash payment. 
E) fixed interest rate for a one-time future cash payment. 
A) floating interest rate for a fixed rate. 
B) fixed interest rate for a lower fixed rate. 
C) floating interest rate for a lower floating rate. 
D) floating interest rate for a one-time immediate cash payment. 
E) fixed interest rate for a one-time future cash payment.

Question 15

If a financial institution has equated the dollar effects of interest rate risk on its assets with the dollar effects on its liabilities,it has engaged in:

Accepted Answer

A) a long futures hedge. 
B) a short futures hedge. 
C) a protected swap. 
D) hedging by matching. 
E) hedging by swapping. 
A) a long futures hedge. 
B) a short futures hedge. 
C) a protected swap. 
D) hedging by matching. 
E) hedging by swapping.

Question 16

Which one of these parties would generally have the most reason to take a short hedge position in the agricultural futures market?

Accepted Answer

A) A local bakery 
B) A wheat farmer 
C) A major breakfast food company 
D) A beverage maker 
E) An international investor 
A) A local bakery 
B) A wheat farmer 
C) A major breakfast food company 
D) A beverage maker 
E) An international investor

Question 17

The duration of a coupon bond is:

Accepted Answer

A) equal to its number of payments. 
B) less than that of a zero coupon bond of equal maturity. 
C) equal to the zero coupon bond of the same maturity. 
D) equal to its maturity. 
E) increases as the time to maturity decreases. 
A) equal to its number of payments. 
B) less than that of a zero coupon bond of equal maturity. 
C) equal to the zero coupon bond of the same maturity. 
D) equal to its maturity. 
E) increases as the time to maturity decreases.

Question 18

A derivative is a financial instrument with a value derived from a:

Accepted Answer

A) regulatory body such as the FTC. 
B) primitive or underlying asset. 
C) specified risk. 
D) negotiated contract. 
E) probability of occurrence. 
A) regulatory body such as the FTC. 
B) primitive or underlying asset. 
C) specified risk. 
D) negotiated contract. 
E) probability of occurrence.

Question 19

Which one of these bonds will have the lowest percentage price change for a stated shift in interest rates?

Accepted Answer

A) 5-year,zero coupon 
B) 5-year,high coupon 
C) 5-year,low coupon 
D) 10-year,low coupon 
E) 10-year,high coupon 
A) 5-year,zero coupon 
B) 5-year,high coupon 
C) 5-year,low coupon 
D) 10-year,low coupon 
E) 10-year,high coupon

Question 20

The buyer of a forward contract will be:

Accepted Answer

A) taking delivery of the goods today at today's price. 
B) making delivery of the goods at a later date at that date's price. 
C) making delivery of the goods today at today's price. 
D) taking delivery of the goods at a later date at a pre-specified price. 
E) deciding on a future date whether or not to take delivery at a pre-specified price. 
A) taking delivery of the goods today at today's price. 
B) making delivery of the goods at a later date at that date's price. 
C) making delivery of the goods today at today's price. 
D) taking delivery of the goods at a later date at a pre-specified price. 
E) deciding on a future date whether or not to take delivery at a pre-specified price.

Exam 25: Derivatives and Hedging Risk

There are always at least ________ counterparties in a credit default swap.

Last week,you sold a futures contract on 5,000 troy ounces of silver at a settle price of $16.59.Today,you made delivery and the daily settle price was $16.62.What amount will you receive at the time of delivery? Assume yesterday's settle price was $16.66.

When interest rates shift,the price of zero coupon bonds are ________ volatile ________

A financial institution has equity equal to one-tenth of its assets.If its asset duration is currently equal to its liability duration,then to immunize,the firm needs to:

Assume a bank has a $25 million mortgage bond risk position which it hedges in the Treasury bond futures market.Approximately how many futures contracts would be needed for this hedge if you assumed mortgage bonds and Treasury bonds were perfectly correlated?

The party most apt to take a long position in agriculture futures is the firm that:

Derivatives can be used to either hedge or speculate.These strategies:

To protect against interest rate risk,the mortgage banker who has committed to lending funds but has yet to raise those funds should:

LIBOR stands for:

You have gathered the following market value and duration information on Northern Bank: What new asset duration will immunize the balance sheet?

A potential disadvantage of forward contracts versus futures contracts is:

You bought a futures contract on corn for $3.55 per bushel and closed the contract five days later at $3.56.The daily closing prices were $3.57,$3.54,$3.53,$3.58,and $3.56.What was the mark-to-market sequence of payments per bushel from (+)and to (−)the clearing house?

Interest rate swaps allow one party to exchange a:

If a financial institution has equated the dollar effects of interest rate risk on its assets with the dollar effects on its liabilities,it has engaged in:

Which one of these parties would generally have the most reason to take a short hedge position in the agricultural futures market?

The duration of a coupon bond is:

A derivative is a financial instrument with a value derived from a:

Which one of these bonds will have the lowest percentage price change for a stated shift in interest rates?

The buyer of a forward contract will be:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements and Cash Flow

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Lessons From Market History

Return, risk, and the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: the Arbitrage Pricing Theory

Risk, cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers,acquisitions,and Divestitures

Financial Distress

International Corporate Finance

Filters

When interest rates shift,the price of zero coupon bonds are volatile