Question 1

What is business interruption insurance?

Accepted Answer

Business interruption insuranc

Question 2

A firm can borrow at fixed AA rates for long-term loans.If it swaps its long-term payments so that it receives the fixed AA rate and pays a AA floating rate,what is the rate of interest on its borrowing if the floating rate is r% and the fixed rate is 1%?

Accepted Answer

A) r + 1% 
B) r - 1% 
C) r% 
D) 1% 
E) 2% 
A) r + 1% 
B) r - 1% 
C) r% 
D) 1% 
E) 2%

Question 3

Heinz uses 2000 tons of corn syrup each year as an ingredient in its tomato ketchup products.Heinz is concerned about the increase in prices of corn-based products and purchases a fixed-price contract to buy corn syrup at $20,000 per ton.What is the impact on earnings before taxes as opposed to no hedging if the price of corn is $15,000 per ton over the next year?

Accepted Answer

A) +$5 million 
B) -$10 million 
C) $0 
D) +$10 million 
E) -$5 million 
A) +$5 million 
B) -$10 million 
C) $0 
D) +$10 million 
E) -$5 million

Question 4

Which of the following best describes how moral hazard affects the price of insurance?

Accepted Answer

A) Since insurers can acquire complete information regarding the riskiness of borrowers,they can charge actuarially fair premiums. 
B) Since firms may have private information about how risky they are,insurers must raise premiums to compensate for the existence of this uncertainty. 
C) Since purchasing insurance reduces the firm's incentive to avoid risk,insurers must raise premiums to compensate for the increase in risk. 
D) Since purchasing insurance reduces the firm's risk,insurers can lower premiums to compensate for the reduction in risk. 
E) Since high premiums will drive away the low-risk firms,insurers must lower premiums in order to attract low-risk borrowers. 
A) Since insurers can acquire complete information regarding the riskiness of borrowers,they can charge actuarially fair premiums. 
B) Since firms may have private information about how risky they are,insurers must raise premiums to compensate for the existence of this uncertainty. 
C) Since purchasing insurance reduces the firm's incentive to avoid risk,insurers must raise premiums to compensate for the increase in risk. 
D) Since purchasing insurance reduces the firm's risk,insurers can lower premiums to compensate for the reduction in risk. 
E) Since high premiums will drive away the low-risk firms,insurers must lower premiums in order to attract low-risk borrowers.

Question 5

One of the drawbacks of using futures contracts to hedge is that managers in a firm may use the futures contracts to ________ and consequently increase the firm's risk rather than reducing it.

Accepted Answer

A) hedge 
B) produce 
C) speculate 
D) increase managerial compensation 
E) expand 
A) hedge 
B) produce 
C) speculate 
D) increase managerial compensation 
E) expand

Question 6

An interest rate that adjusts to current market conditions is called a(n):

Accepted Answer

A) floating rate. 
B) fixed rate. 
C) notional rate. 
D) arbitrage rate. 
E) preferential rate 
A) floating rate. 
B) fixed rate. 
C) notional rate. 
D) arbitrage rate. 
E) preferential rate

Question 7

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

Question 8

By combining ________ with ________,firms can choose which of these sources of interest rate risk they will tolerate and which they will eliminate.

Accepted Answer

A) calls,futures 
B) calls,puts 
C) futures,puts 
D) swaps,loans 
E) options,futures 
A) calls,futures 
B) calls,puts 
C) futures,puts 
D) swaps,loans 
E) options,futures

Question 9

After purchasing fire insurance,a firm decides to cut costs by reducing spending on fire prevention.This is an example of:

Accepted Answer

A) adverse selection. 
B) moral hazard. 
C) the insurance dilemma. 
D) actuarial fairness. 
E) insurance risk. 
A) adverse selection. 
B) moral hazard. 
C) the insurance dilemma. 
D) actuarial fairness. 
E) insurance risk.

Question 10

Being long a futures contract is equivalent to purchasing a put option.

Accepted Answer

A) True 
 B)False

Question 11

A company has a current tax rate of 30% and faces a 20% chance that the its output prices will drop and it will lose $100,000 over the next year.The firm would then be in a 15% tax bracket if it faces a loss.Compute the net present value (NPV)from purchasing insurance if the rate of interest is 5% and the beta of the output prices is 0.

Accepted Answer

A) $2,857 
B) $2,189 
C) $2,357 
D) $2,591 
E) $2,062 
A) $2,857 
B) $2,189 
C) $2,357 
D) $2,591 
E) $2,062

Question 12

A gold mining firm sells futures contracts worth 1000 ounces at a price of $700 per ounce for maturity one year from today.If gold futures prices increase to $752 per ounce,what is the cash flow to the producer?

Accepted Answer

A) -$2000 
B) $2000 
C) $0 
D) -$52,000 
E) $52,000 
A) -$2000 
B) $2000 
C) $0 
D) -$52,000 
E) $52,000

Question 13

How might a decrease in interest rates reduce firm value?

Accepted Answer

Many firms have fixed long-term future l

Question 14

The change in behaviour that results from the presence of insurance is referred to as moral hazard.

Accepted Answer

A) True 
 B)False

Question 15

A firm can borrow at a fixed rate of 7.25% on long-term loans.If it swaps its long-term payments so that it receives 6.5% and pays a floating rate of LIBOR,what is the rate of interest on its borrowing?

Accepted Answer

A) LIBOR + 7.25% 
B) LIBOR + 6.5% 
C) LIBOR - 0.75% 
D) LIBOR 
E) LIBOR + 0.75% 
A) LIBOR + 7.25% 
B) LIBOR + 6.5% 
C) LIBOR - 0.75% 
D) LIBOR 
E) LIBOR + 0.75%

Question 16

A provision in an insurance policy in which an initial amount of loss is not covered by the policy and must be paid by the insured is known as a:

Accepted Answer

A) security deposit. 
B) market imperfection. 
C) policy limit. 
D) deductible. 
E) loss premium. 
A) security deposit. 
B) market imperfection. 
C) policy limit. 
D) deductible. 
E) loss premium.

Question 17

A firm can borrow at fixed AA rates plus 1% for long-term loans.If it swaps its long-term payments so that it receives the fixed AA rate and pays a AA floating rate,what is the rate of interest on its borrowing if the floating rate is r%?

Accepted Answer

A) r + 1% 
B) r - 1% 
C) r% 
D) 1% 
E) 2% 
A) r + 1% 
B) r - 1% 
C) r% 
D) 1% 
E) 2%

Question 18

When a firm can pass on its cost increases to its customers and revenue decreases to its suppliers,it has a ________ hedge.

Accepted Answer

A) natural 
B) basis 
C) vertical 
D) horizontal 
E) hidden 
A) natural 
B) basis 
C) vertical 
D) horizontal 
E) hidden

Question 19

What is a margin call?

Accepted Answer

A margin call is a requirement for inves

Question 20

A firm estimates that the loss from a weather-related closing is $40 million and the probability of occurrence is 0.1% over the next year.If claims are paid at the end of the year,the annual risk-free rate is 5%,the market risk premium is 6%,and the beta of these losses is 0.9,compute the insurance premium.

Accepted Answer

A) $28,276 
B) $28,672 
C) $36,232 
D) $39,491 
E) $32,448 
A) $28,276 
B) $28,672 
C) $36,232 
D) $39,491 
E) $32,448

Exam 21: Risk Management

What is business interruption insurance?

A firm can borrow at fixed AA rates for long-term loans.If it swaps its long-term payments so that it receives the fixed AA rate and pays a AA floating rate,what is the rate of interest on its borrowing if the floating rate is r% and the fixed rate is 1%?

Which of the following best describes how moral hazard affects the price of insurance?

One of the drawbacks of using futures contracts to hedge is that managers in a firm may use the futures contracts to ________ and consequently increase the firm's risk rather than reducing it.

An interest rate that adjusts to current market conditions is called a(n):

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

By combining ________ with ________,firms can choose which of these sources of interest rate risk they will tolerate and which they will eliminate.

After purchasing fire insurance,a firm decides to cut costs by reducing spending on fire prevention.This is an example of:

Being long a futures contract is equivalent to purchasing a put option.

A gold mining firm sells futures contracts worth 1000 ounces at a price of $700 per ounce for maturity one year from today.If gold futures prices increase to $752 per ounce,what is the cash flow to the producer?

How might a decrease in interest rates reduce firm value?

The change in behaviour that results from the presence of insurance is referred to as moral hazard.

A firm can borrow at a fixed rate of 7.25% on long-term loans.If it swaps its long-term payments so that it receives 6.5% and pays a floating rate of LIBOR,what is the rate of interest on its borrowing?

A provision in an insurance policy in which an initial amount of loss is not covered by the policy and must be paid by the insured is known as a:

A firm can borrow at fixed AA rates plus 1% for long-term loans.If it swaps its long-term payments so that it receives the fixed AA rate and pays a AA floating rate,what is the rate of interest on its borrowing if the floating rate is r%?

When a firm can pass on its cost increases to its customers and revenue decreases to its suppliers,it has a ________ hedge.

What is a margin call?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

Filters

By combining with ,firms can choose which of these sources of interest rate risk they will tolerate and which they will eliminate.