Question 1

Which of the following is NOT an attribute of a forward of futures contract?

Accepted Answer

A)  Because futures contracts are between anonymous parties, there is a risk of default as each party may not be in a position to assess the credit worthiness of the other party . 
B)  Since a forward contract is only a customary agreement between non-anonymous parties, there is a risk that one party may default if future prices deviate materially from the contracted price. 
C)  By alternatively using a future contract rather than a forward contract, the risk of default is eliminated. 
D)  In the case of a forward contract where the contract is negotiated with a known party, a firm may be disclosing strategic information regarding its risk exposure. 
A)  Because futures contracts are between anonymous parties, there is a risk of default as each party may not be in a position to assess the credit worthiness of the other party . 
B)  Since a forward contract is only a customary agreement between non-anonymous parties, there is a risk that one party may default if future prices deviate materially from the contracted price. 
C)  By alternatively using a future contract rather than a forward contract, the risk of default is eliminated. 
D)  In the case of a forward contract where the contract is negotiated with a known party, a firm may be disclosing strategic information regarding its risk exposure.

Question 2

Which of the following statements is false?

Accepted Answer

A)  The swap contract-like forward and futures contracts-is typically structured as a "zero-cost" security. 
B)  An interest rate swap is a contract entered into with a bank, much like a forward contract, in which the firm and the bank agree to exchange the coupons from two different types of loans. 
C)  In a standard interest rate swap, one party agrees to pay coupons based on a fixed interest rate in exchange for receiving coupons based on the prevailing market interest rate during each coupon period. 
D)  If short-term interest rates were to fall while long-term rates remained stable, then short-term securities would fall in value relative to long-term securities, despite their shorter duration. 
A)  The swap contract-like forward and futures contracts-is typically structured as a "zero-cost" security. 
B)  An interest rate swap is a contract entered into with a bank, much like a forward contract, in which the firm and the bank agree to exchange the coupons from two different types of loans. 
C)  In a standard interest rate swap, one party agrees to pay coupons based on a fixed interest rate in exchange for receiving coupons based on the prevailing market interest rate during each coupon period. 
D)  If short-term interest rates were to fall while long-term rates remained stable, then short-term securities would fall in value relative to long-term securities, despite their shorter duration.

Question 3

The exchange rate between Canadian dollar and the U.S.dollar is a(n)________.

Accepted Answer

A)  fixed rate 
B)  floating rate 
C)  flexible rate 
D)  eclectic rate 
A)  fixed rate 
B)  floating rate 
C)  flexible rate 
D)  eclectic rate

Question 4

Insurance that compensates for the loss or unavoidable absence of crucial employees in the firm is called

Accepted Answer

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

Question 5

To cover the costs that result if some aspect of the business causes harm to a third party or someone else's property a firm would purchase

Accepted Answer

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

Question 6

What is the actuarially fair cost of full insurance?

Accepted Answer

Insurance Premium =

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

The cash-and-carry strategy consists of all of the following simultaneous trades EXCEPT

Accepted Answer

A)  borrow euros today using a one-year loan with the interest rate r€. 
B)  exchange the euros for dollars today at the spot exchange rate S $/€. 
C)  purchase a forward contract to convert $ to €. 
D)  invest the dollars today for one year at the interest rate r$. 
A)  borrow euros today using a one-year loan with the interest rate r€. 
B)  exchange the euros for dollars today at the spot exchange rate S $/€. 
C)  purchase a forward contract to convert $ to €. 
D)  invest the dollars today for one year at the interest rate r$.

Question 9

In December 2005,the spot exchange rate for the British Pound was CND$1.7188/£.Suppose that at the same time the one-year interest rate in Canada 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 10

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 exchange 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 exchange 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 11

The Century 22 Fund has invested in a portfolio of mortgage-backed securities that has a current market value of $245 million.The duration of this portfolio of mortgage-backed securities is 14.7 years.The fund has borrowed to purchase these securities,and the current value of its liabilities (i.e.,the current value of the bonds Century 22 has issued)is $160 million.The duration of these liabilities is 5.4 years.What is the initial duration of the equity for the Century 22 fund?

Accepted Answer

D_E = D_{A - L} = @#IMG-DLM& D

Question 12

Which of the following statements is false?

Accepted Answer

A)  Interest rate swaps are an alternative means of modifying the firm's interest rate risk exposure without buying or selling assets. 
B)  A portfolio with a negative duration is called a duration-neutral portfolio or an immunized portfolio, which means that for small interest rate fluctuations, the value of equity should remain unchanged. 
C)  Maintaining a duration-neutral portfolio will require constant adjustment as interest rates change. 
D)  A duration-neutral portfolio is only protected against interest rate changes that affect all yields identically. 
A)  Interest rate swaps are an alternative means of modifying the firm's interest rate risk exposure without buying or selling assets. 
B)  A portfolio with a negative duration is called a duration-neutral portfolio or an immunized portfolio, which means that for small interest rate fluctuations, the value of equity should remain unchanged. 
C)  Maintaining a duration-neutral portfolio will require constant adjustment as interest rates change. 
D)  A duration-neutral portfolio is only protected against interest rate changes that affect all yields identically.

Exam 30: Risk Management

Which of the following is NOT an attribute of a forward of futures contract?

Which of the following statements is false?

The exchange rate between Canadian dollar and the U.S.dollar is a(n)________.

Insurance that compensates for the loss or unavoidable absence of crucial employees in the firm is called

To cover the costs that result if some aspect of the business causes harm to a third party or someone else's property a firm would purchase

What is the actuarially fair cost of full insurance?

The cash-and-carry strategy consists of all of the following simultaneous trades EXCEPT

In December 2005,the spot exchange rate for the British Pound was CND$1.7188/£.Suppose that at the same time the one-year interest rate in Canada 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?

Which of the following statements is false?

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

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