Question 1

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 2

Hedging involves contracts or transactions that provide the firm with ________ that offset its losses from price changes.

Accepted Answer

A)  profits 
B)  incomes 
C)  cash flows 
D)  net earnings 
A)  profits 
B)  incomes 
C)  cash flows 
D)  net earnings

Question 3

What is the duration of a five-year zero-coupon bond?

Accepted Answer

A)  2.5 years 
B)  1 year 
C)  5 years 
D)  0 years 
A)  2.5 years 
B)  1 year 
C)  5 years 
D)  0 years

Question 4

The insurance payment to the firm tends to be ________ when total losses are ________ and the market portfolio is ________.

Accepted Answer

A)  smaller; high; low 
B)  larger; high; low 
C)  larger; low; high 
D)  smaller; low; low 
A)  smaller; high; low 
B)  larger; high; low 
C)  larger; low; high 
D)  smaller; low; low

Question 5

In a perfect market without other frictions,insurance companies should compete until they are just earning a fair return and the NPV from selling insurance is ________.

Accepted Answer

A)  uncertain 
B)  positive 
C)  negative 
D)  zero 
A)  uncertain 
B)  positive 
C)  negative 
D)  zero

Question 6

Your oil refinery will need to buy 250,000 barrels of crude oil in one week and it is worried about crude oil prices.Suppose you go long 250 crude oil futures contracts,each for 1,000 barrels of crude oil,at the current futures price of $68 per barrel.Suppose futures prices change each day over the next week as follows:
   What is the daily and cumulative mark to market profit or loss (in dollars)that you will have on each of the next five days?

Accepted Answer

The answer of Your oil refinery will need to buy...

Question 7

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 8

Which of the following statements is false?

Accepted Answer

A)  Corporations use interest rate swaps routinely to alter their exposure to interest rate fluctuations. Firms can use interest rate swaps with duration-hedging strategies. 
B)  The value of a swap, while initially zero, will fluctuate over time as interest rates change. 
C)  An interest rate that adjusts to current market conditions is called a floating rate. 
D)  When interest rates rise, the swap's value will rise for the party receiving the fixed rate; conversely, it will fall for the party paying the fixed rate. 
A)  Corporations use interest rate swaps routinely to alter their exposure to interest rate fluctuations. Firms can use interest rate swaps with duration-hedging strategies. 
B)  The value of a swap, while initially zero, will fluctuate over time as interest rates change. 
C)  An interest rate that adjusts to current market conditions is called a floating rate. 
D)  When interest rates rise, the swap's value will rise for the party receiving the fixed rate; conversely, it will fall for the party paying the fixed rate.

Question 9

Which of the following statements is false?

Accepted Answer

A)  We can measure a firm's sensitivity to interest rates by computing the duration of its balance sheet. 
B)  A firm's market capitalization is determined by the difference in the market value of its assets and its liabilities. 
C)  By restructuring the balance sheet to increase its duration, we can hedge the firm's interest rate risk. 
D)  All of the above are true. 
A)  We can measure a firm's sensitivity to interest rates by computing the duration of its balance sheet. 
B)  A firm's market capitalization is determined by the difference in the market value of its assets and its liabilities. 
C)  By restructuring the balance sheet to increase its duration, we can hedge the firm's interest rate risk. 
D)  All of the above are true.

Question 10

A decrease in interest rates raises ________ of short-term and long-term liabilities and can ________ the value of the firm.

Accepted Answer

A)  the present value; lower 
B)  the present value; increase 
C)  the future value; lower 
D)  the future value; increase 
A)  the present value; lower 
B)  the present value; increase 
C)  the future value; lower 
D)  the future value; increase

Question 11

Luther Industries needs to borrow $50 million in cash.Currently long-term AAA rates are 9%.Luther can borrow at 9.75% given its current credit rating.Luther is expecting interest rates to fall over the next few years,so it would prefer to borrow at the short-term rates and refinance after rates have dropped.Luther's management is afraid,however,that its credit rating may fall which could greatly increase the spread the firm must pay on new borrowings.How can Luther benefit from the expected decline in future interest rates without exposure to the risk that the potential future changes to its credit ratings brings?

Accepted Answer

Luther can borrow at the long term rate

Question 12

Which of the following statements is false?

Accepted Answer

A)  Firms generally do not possess better information than outside investors regarding the risk of future commodity price changes, nor can they influence that risk through their actions. 
B)  Cash flows in a futures contract are exchanged on a monthly basis, rather than waiting until the end of the contract, through a procedure called marking to market. 
C)  The firm may speculate by entering into contracts that do not offset its actual risks. 
D)  When a firm authorizes managers to trade contracts to hedge, it opens the door to the possibility of speculation. 
A)  Firms generally do not possess better information than outside investors regarding the risk of future commodity price changes, nor can they influence that risk through their actions. 
B)  Cash flows in a futures contract are exchanged on a monthly basis, rather than waiting until the end of the contract, through a procedure called marking to market. 
C)  The firm may speculate by entering into contracts that do not offset its actual risks. 
D)  When a firm authorizes managers to trade contracts to hedge, it opens the door to the possibility of speculation.

Question 13

Which of the following statements is false?

Accepted Answer

A)  Because insurance reduces the risk of financial distress, it can relax the tradeoff between the costs and benefits of debt and allow the firm to increase its use of debt financing. 
B)  By lowering the volatility of the stock, insurance discourages concentrated ownership by an outside director or investor who will monitor the firm and its management. 
C)  When a firm is subject to graduated income tax rates, insurance can produce a tax savings if the firm is in a higher tax bracket when it pays the premium than the tax bracket it is in when it receives the insurance payment in the event of a loss. 
D)  In a perfect market without other frictions, insurance companies should compete until they are just earning a fair return and the NPV from selling insurance is zero. The NPV is zero if the price of insurance equals the present value of the expected payment; in that case, we say the price is actuarially fair. 
A)  Because insurance reduces the risk of financial distress, it can relax the tradeoff between the costs and benefits of debt and allow the firm to increase its use of debt financing. 
B)  By lowering the volatility of the stock, insurance discourages concentrated ownership by an outside director or investor who will monitor the firm and its management. 
C)  When a firm is subject to graduated income tax rates, insurance can produce a tax savings if the firm is in a higher tax bracket when it pays the premium than the tax bracket it is in when it receives the insurance payment in the event of a loss. 
D)  In a perfect market without other frictions, insurance companies should compete until they are just earning a fair return and the NPV from selling insurance is zero. The NPV is zero if the price of insurance equals the present value of the expected payment; in that case, we say the price is actuarially fair.

Question 14

In reality market imperfections exist that can raise the cost of insurance above the actuarially fair price and offset some of these benefits.These insurance market imperfections include all of the following EXCEPT

Accepted Answer

A)  adverse selection. 
B)  agency costs. 
C)  administrative and overhead costs. 
D)  taxation of insurance payments. 
A)  adverse selection. 
B)  agency costs. 
C)  administrative and overhead costs. 
D)  taxation of insurance payments.

Question 15

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 16

Which of the following statements is false?

Accepted Answer

A)  Long-term supply contracts cannot be entered into anonymously; the buyer and seller know each other's identity. This lack of anonymity may have strategic disadvantages. 
B)  A futures contract is an agreement to trade an asset on some future date, at a price that is locked in today. 
C)  An alternative to vertical integration or storage is a long-term supply contract. 
D)  Long-term supply contracts are unilateral contracts determined by a seller. 
A)  Long-term supply contracts cannot be entered into anonymously; the buyer and seller know each other's identity. This lack of anonymity may have strategic disadvantages. 
B)  A futures contract is an agreement to trade an asset on some future date, at a price that is locked in today. 
C)  An alternative to vertical integration or storage is a long-term supply contract. 
D)  Long-term supply contracts are unilateral contracts determined by a seller.

Question 17

Which of the following statements regarding long-term supply contracts is false?

Accepted Answer

A)  The market value of the contract at any point in time may not be easy to determine, making it difficult to track gains and losses. 
B)  Long-term supply contracts are designed to eliminate credit risk. 
C)  Long-term supply contracts insulate the firms from commodity price risk. 
D)  Long-term supply contracts are bilateral contracts negotiated by a buyer and a seller. 
A)  The market value of the contract at any point in time may not be easy to determine, making it difficult to track gains and losses. 
B)  Long-term supply contracts are designed to eliminate credit risk. 
C)  Long-term supply contracts insulate the firms from commodity price risk. 
D)  Long-term supply contracts are bilateral contracts negotiated by a buyer and a seller.

Question 18

Assuming that your firm will purchase insurance,what is the minimum-size deductible that would leave your firm with an incentive to implement the new safety policies?

Accepted Answer

If the firm is fully insured (no deducti

Question 19

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 20

Which of the following statements is false?

Accepted Answer

A)  Horizontal integration entails the merger of a firm and its supplier or a firm and its customer. 
B)  Like insurance, hedging involves contracts or transactions that provide the firm with cash flows that offset its losses from price changes. 
C)  For many firms, changes in the market prices of the raw materials they use and the goods they produce may be the most important source of risk to their profitability. 
D)  Because an increase in the price of the commodity raises the firm's costs and the supplier's revenues, these firms can offset their risks by merging. 
A)  Horizontal integration entails the merger of a firm and its supplier or a firm and its customer. 
B)  Like insurance, hedging involves contracts or transactions that provide the firm with cash flows that offset its losses from price changes. 
C)  For many firms, changes in the market prices of the raw materials they use and the goods they produce may be the most important source of risk to their profitability. 
D)  Because an increase in the price of the commodity raises the firm's costs and the supplier's revenues, these firms can offset their risks by merging.

Exam 30: Risk Management

Which of the following statements is false?

Hedging involves contracts or transactions that provide the firm with ________ that offset its losses from price changes.

What is the duration of a five-year zero-coupon bond?

The insurance payment to the firm tends to be ________ when total losses are ________ and the market portfolio is ________.

In a perfect market without other frictions,insurance companies should compete until they are just earning a fair return and the NPV from selling insurance is ________.

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

Which of the following statements is false?

Which of the following statements is false?

A decrease in interest rates raises ________ of short-term and long-term liabilities and can ________ the value of the firm.

Which of the following statements is false?

Which of the following statements is false?

In reality market imperfections exist that can raise the cost of insurance above the actuarially fair price and offset some of these benefits.These insurance market imperfections include all of the following EXCEPT

Which of the following statements regarding futures contracts is false?

Which of the following statements is false?

Which of the following statements regarding long-term supply contracts is false?

Assuming that your firm will purchase insurance,what is the minimum-size deductible that would leave your firm with an incentive to implement the new safety policies?

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

Which of the following statements is false?

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

The Time Value of Money

Interest Rates

Valuing Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behaviour and Capital Market Efficiency

Financial Options

Option Valuation

Real Options

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 Modelling: a Case Study

The Mechanics of Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

International Corporate Finance

Filters

The insurance payment to the firm tends to be when total losses are and the market portfolio is .

A decrease in interest rates raises of short-term and long-term liabilities and can the value of the firm.