Question 1

A ________ contract is often used for hedging and is an exchange-traded agreement to purchase an asset at some future date at a price that is locked in today.

Accepted Answer

A) call option 
B) futures 
C) put option 
D) long term 
E) storage 
A) call option 
B) futures 
C) put option 
D) long term 
E) storage

Question 2

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

Question 3

A restaurant decides to insure itself against the risk of fire.The insurance company estimates that the probability of a fire is 0.1% and the expected payment should a fire occur is $10 million.If the risk-free rate is 4%,the expected return on the market is 9%,and the beta of the risk is -3,what is the actuarially fair insurance premium?

Accepted Answer

A) $9,174 
B) $9,524 
C) $9,615 
D) $9,009 
E) $11,236 
A) $9,174 
B) $9,524 
C) $9,615 
D) $9,009 
E) $11,236

Question 4

A restaurant decides to insure itself against the risk of fire.The insurance company estimates that the probability of a fire is 0.1% and the expected payment should a fire occur is $10 million.If the risk-free rate is 4%,the expected return on the market is 9%,and the beta of the risk is 0,what is the actuarially fair insurance premium?

Accepted Answer

A) $9,016 
B) $9,174 
C) $9,524 
D) $9,615 
E) $10,000 
A) $9,016 
B) $9,174 
C) $9,524 
D) $9,615 
E) $10,000

Question 5

A firm can borrow at a fixed rate of 6.5% on long-term loans.If it swaps its long-term payments so that it receives 4% and pays a floating rate of LIBOR,what is the rate of interest on its borrowing?

Accepted Answer

A) LIBOR + 2.5% 
B) LIBOR 
C) LIBOR + 6.5% 
D) LIBOR - 2.5% 
E) LIBOR - 4% 
A) LIBOR + 2.5% 
B) LIBOR 
C) LIBOR + 6.5% 
D) LIBOR - 2.5% 
E) LIBOR - 4%

Question 6

When firms use futures contracts for hedging,cash flows are received and paid daily rather than waiting until the end of the contract through a procedure called:

Accepted Answer

A) cash flow hedging. 
B) marking to market. 
C) swaps. 
D) put-call parity. 
E) daily settlement. 
A) cash flow hedging. 
B) marking to market. 
C) swaps. 
D) put-call parity. 
E) daily settlement.

Question 7

A firm estimates that the loss from a weather-related closing is $20 million and the probability of occurrence is 0.2% 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 0.7,compute the insurance premium.

Accepted Answer

A) $28,198 
B) $36,630 
C) $37,259 
D) $39,491 
E) $38,175 
A) $28,198 
B) $36,630 
C) $37,259 
D) $39,491 
E) $38,175

Question 8

A firm wishes to buy fire insurance at its plant.The loss in case of fire is estimated to be $20 million and the probability of occurrence is 0.1% over the next year.If claims are paid at the end of the year and the annual risk-free rate is 10%,compute the insurance premium.

Accepted Answer

A) $15,304 
B) $16,364 
C) $18,182 
D) $19,234 
E) $17,175 
A) $15,304 
B) $16,364 
C) $18,182 
D) $19,234 
E) $17,175

Question 9

The risk of fire at a car assembly plant is 0.3%.If the firm will receive a payment of $20 million in one year if there is a fire during the year,what is the net present value (NPV)of purchasing insurance if the firm will face financial distress costs of $6 million and issuance costs of $1 million in the event of a loss if the risk-free rate is 5%?

Accepted Answer

A) $19,429 
B) $20,000 
C) $22,176 
D) $23,981 
E) $24,514 
A) $19,429 
B) $20,000 
C) $22,176 
D) $23,981 
E) $24,514

Question 10

Insurance for large risks that cannot be well diversified has a(n)________,which increases its cost.

Accepted Answer

A) positive beta 
B) moral hazard clause 
C) negative beta 
D) actuarially-biased risk 
E) zero beta 
A) positive beta 
B) moral hazard clause 
C) negative beta 
D) actuarially-biased risk 
E) zero beta

Question 11

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

Accepted Answer

Such contracts have several potential di

A ________ contract is often used for hedging and is an exchange-traded agreement to purchase an asset at some future date at a price that is locked in today.

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:

A firm can borrow at a fixed rate of 6.5% on long-term loans.If it swaps its long-term payments so that it receives 4% and pays a floating rate of LIBOR,what is the rate of interest on its borrowing?

When firms use futures contracts for hedging,cash flows are received and paid daily rather than waiting until the end of the contract through a procedure called:

A firm wishes to buy fire insurance at its plant.The loss in case of fire is estimated to be $20 million and the probability of occurrence is 0.1% over the next year.If claims are paid at the end of the year and the annual risk-free rate is 10%,compute the insurance premium.

Insurance for large risks that cannot be well diversified has a(n)________,which increases its cost.

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

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

Exam 21: Risk Management

A ________ contract is often used for hedging and is an exchange-traded agreement to purchase an asset at some future date at a price that is locked in today.

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:

A firm can borrow at a fixed rate of 6.5% on long-term loans.If it swaps its long-term payments so that it receives 4% and pays a floating rate of LIBOR,what is the rate of interest on its borrowing?

When firms use futures contracts for hedging,cash flows are received and paid daily rather than waiting until the end of the contract through a procedure called:

A firm wishes to buy fire insurance at its plant.The loss in case of fire is estimated to be $20 million and the probability of occurrence is 0.1% over the next year.If claims are paid at the end of the year and the annual risk-free rate is 10%,compute the insurance premium.

Insurance for large risks that cannot be well diversified has a(n)________,which increases its cost.

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

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