Question 1

Which of the following types of insurance cannot be sold in the United States?

Accepted Answer

A) Insurance that protects against loss of revenue due to bad weather. 
B) Insurance that protects a companies executives and directors from lawsuits. 
C) Life insurance which pays the corporation when an employee dies. 
D) All these types of insurance can be sold in the U.S. 
A) Insurance that protects against loss of revenue due to bad weather. 
B) Insurance that protects a companies executives and directors from lawsuits. 
C) Life insurance which pays the corporation when an employee dies. 
D) All these types of insurance can be sold in the U.S. D

Question 2

Jorge has purchased call options on 1000 shares of Amazon stock with a striking price of $170 per share.The option premium was $4.00 per share.
a.Compute Jorge's profit or loss if the market value of Amazon's stock is $180 at expiration.
b.Compute Jorge's profit or loss if the market value of Amazon's stock is $160 at expiration.
c.Compute Jorge's profit or loss if the market value of Amazon's stock is $172 at expiration.

Accepted Answer

a.Profit on the stock = $10 × 1000 = $10,000.Subtracting the premium,$10,000 - $4(1000)= $6,000 profit.
b.The option will not be exercised.Jorge loses the $4,000 option premium.
c.Profit on the stock = $2 ×1000 = $2,000.Subtracting the premium,$2,000 - $4(1000)= ($2,000)loss.

Question 3

How can a gold futures contract be used as a hedge against a potentially dramatic decrease in the price of the gold needed as an input into the production of computer microprocessors?

Accepted Answer

A) The computer company should sell gold futures contracts. 
B) The computer company should sell more gold futures contracts than it should buy. 
C) This is a standard business situation,which would be favorable if it were to happen,so no hedge is needed. 
D) The computer company should lower its finished product prices now in anticipation of the decrease in the price of gold inputs. 
A) The computer company should sell gold futures contracts. 
B) The computer company should sell more gold futures contracts than it should buy. 
C) This is a standard business situation,which would be favorable if it were to happen,so no hedge is needed. 
D) The computer company should lower its finished product prices now in anticipation of the decrease in the price of gold inputs. C

Question 4

If you expect a stock's price to drop,it would be better to sell a call on that stock than to sell a put on it.

Accepted Answer

A) True 
 B)False

Question 5

As the length of time left until expiration increases,the value of call and put options on the stock also increases.

Accepted Answer

A) True 
 B)False

Question 6

A(n)________ is a contract that requires the holder to buy or sell a stated commodity at a specified price at a specified time in the future.

Accepted Answer

A) warrant 
B) option 
C) future 
D) convertible contract 
A) warrant 
B) option 
C) future 
D) convertible contract

Question 7

There is no actual buying or selling that occurs with a futures contract.

Accepted Answer

A) True 
 B)False

Question 8

A(n)________ can be exercised only on the expiration date.

Accepted Answer

A) European option 
B) at-the-money option 
C) short option 
D) American option 
A) European option 
B) at-the-money option 
C) short option 
D) American option

Question 9

A large agribusiness firm has contracted to deliver 100,000 bushels of wheat for $8.50 a bushel at the end of October.On the delivery date,the spot price of wheat is $8.70 per bushel.Which of the following is true?

Accepted Answer

A) The seller of the contract has $20,000 loss. 
B) The buyer of the contract has a $20,000 loss. 
C) The buyer of the contract has a $20,000 profit 
D) Both A and C are true 
A) The seller of the contract has $20,000 loss. 
B) The buyer of the contract has a $20,000 loss. 
C) The buyer of the contract has a $20,000 profit 
D) Both A and C are true

Question 10

Which of the following scenarios carries the least risk of NOT being able to meet required payments (capital expenditure,dividend,interest and principal requirements)totaling $96 million?

Accepted Answer

A) Expected cash flow,$116 million,standard deviation $5 million 
B) Expected cash flow,$107 million,standard deviation $5.5 million 
C) Expected cash flow,$112 million,standard deviation $8 million 
D) Expected cash flow,$134 million,standard deviation $38 million 
A) Expected cash flow,$116 million,standard deviation $5 million 
B) Expected cash flow,$107 million,standard deviation $5.5 million 
C) Expected cash flow,$112 million,standard deviation $8 million 
D) Expected cash flow,$134 million,standard deviation $38 million

Question 11

The price at which the stock or asset may be purchased from (or sold to)the option writer is referred to as:

Accepted Answer

A) intrinsic value of the option. 
B) option premium. 
C) open interest. 
D) exercise or striking price. 
A) intrinsic value of the option. 
B) option premium. 
C) open interest. 
D) exercise or striking price.

Question 12

Workers' compensation insurance provides coverage for on-the-job injuries suffered by employees.

Accepted Answer

A) True 
 B)False

Question 13

Swenson Oil & Gas allows its customers to prepurchase heating oil in June for the coming winter.Swenson's customers who take advantage of the offer:

Accepted Answer

A) are speculating that fuel prices will be higher in the future. 
B) have purchased a form of call option for heating fuel. 
C) are entering into a futures contract to offset the risk of higher fuel prices during the winter. 
D) are purchasing a form of insurance against fuel shortages. 
A) are speculating that fuel prices will be higher in the future. 
B) have purchased a form of call option for heating fuel. 
C) are entering into a futures contract to offset the risk of higher fuel prices during the winter. 
D) are purchasing a form of insurance against fuel shortages.

Question 14

What is the value of d2 that should be used when calculating the value of a call option on this stock with the Black- Scholes option pricing model.

Accepted Answer

A) .33464 
B) .07483 
C) .40822 
D) .01842 
A) .33464 
B) .07483 
C) .40822 
D) .01842

Question 15

Swenson Oil & Gas allows its customers to prepurchase heating oil in June for the coming winter.Customers who took advantage of the offer prepurchased 400,000 gallons of oil at $3.00 per gallon.Swenson hedged its position by contracting to purchase 400,000 gallons of oil for November delivery at a price of $2.50 per gallon.If the November spot price is $2.25 per gallon,the payoff to Swenson is:

Accepted Answer

A) $100,000. 
B) ($100,000). 
C) $200,000. 
D) $0.00. 
A) $100,000. 
B) ($100,000). 
C) $200,000. 
D) $0.00.

Question 16

Ahmad bought call options on Home Depot with a striking price of $34.The option premium was $3.50.Just before the contract expired,Home Depot stock was $36 per share.Ahmad:

Accepted Answer

A) made a profit of $2.00 per share. 
B) lost $3.50 per share because the option would not be exercised. 
C) made a profit of $3.50 per share. 
D) lost $1.50 per share. 
A) made a profit of $2.00 per share. 
B) lost $3.50 per share because the option would not be exercised. 
C) made a profit of $3.50 per share. 
D) lost $1.50 per share.

Question 17

A futures contract is a specialized form of a forward contract distinguished by an organized exchange which encourages confidence in the futures market by allowing for the effective regulation of trading.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following individual situations would best justify the cost of a life insurance policy?

Accepted Answer

A) Single income with young children. 
B) Single income,no dependents. 
C) Dual income,grown children. 
D) Married couple,each had substantial income before retirement. 
A) Single income with young children. 
B) Single income,no dependents. 
C) Dual income,grown children. 
D) Married couple,each had substantial income before retirement.

Question 19

Uses of future contracts include:

Accepted Answer

A) eliminating uncertainty about the future cost of key inputs. 
B) eliminating uncertainty about the prices that will be received when a commodity is ready for market. 
C) speculating on future price movements of commodities which the speculator neither uses nor produces. 
D) all of the above. 
A) eliminating uncertainty about the future cost of key inputs. 
B) eliminating uncertainty about the prices that will be received when a commodity is ready for market. 
C) speculating on future price movements of commodities which the speculator neither uses nor produces. 
D) all of the above.

Question 20

You purchased one July futures contract of pork bellies at $.59 per lb.One contract represents 40,000 lbs.of pork bellies.Initial margin on the contract was 4% of the contract price with a maintenance margin of $500.By the end of the day,the price had fallen to $.57 per lb.How much will you be required to add to your margin account to replenish your maintenance margin?

Accepted Answer

A) None 
B) $356 
C) $144 
D) $32 
A) None 
B) $356 
C) $144 
D) $32

Which of the following types of insurance cannot be sold in the United States?

How can a gold futures contract be used as a hedge against a potentially dramatic decrease in the price of the gold needed as an input into the production of computer microprocessors?

If you expect a stock's price to drop,it would be better to sell a call on that stock than to sell a put on it.

As the length of time left until expiration increases,the value of call and put options on the stock also increases.

A(n)________ is a contract that requires the holder to buy or sell a stated commodity at a specified price at a specified time in the future.

There is no actual buying or selling that occurs with a futures contract.

A(n)________ can be exercised only on the expiration date.

A large agribusiness firm has contracted to deliver 100,000 bushels of wheat for $8.50 a bushel at the end of October.On the delivery date,the spot price of wheat is $8.70 per bushel.Which of the following is true?

Which of the following scenarios carries the least risk of NOT being able to meet required payments (capital expenditure,dividend,interest and principal requirements)totaling $96 million?

The price at which the stock or asset may be purchased from (or sold to)the option writer is referred to as:

Workers' compensation insurance provides coverage for on-the-job injuries suffered by employees.

Swenson Oil & Gas allows its customers to prepurchase heating oil in June for the coming winter.Swenson's customers who take advantage of the offer:

What is the value of d₂that should be used when calculating the value of a call option on this stock with the Black- Scholes option pricing model.

Ahmad bought call options on Home Depot with a striking price of $34.The option premium was $3.50.Just before the contract expired,Home Depot stock was $36 per share.Ahmad:

A futures contract is a specialized form of a forward contract distinguished by an organized exchange which encourages confidence in the futures market by allowing for the effective regulation of trading.

Which of the following individual situations would best justify the cost of a life insurance policy?

Uses of future contracts include:

Getting Started-Principles of Finance

Firms and the Financial Market

Understanding Financial Statements, taxes, and Cash Flows

Financial Analysis-Sizing up Firm Performance

Time Value of Money-The Basics

The Time Value of Money-Annuities and Other Topics

An Introduction to Risk and Return-History of Financial Market Returns

Risk and Return-Capital Market Theory

Debt Valuation and Interest Rates

Stock Valuation

Investment Decision Criteria

Analyzing Project Cash Flows

Risk Analysis and Project Evaluation

The Cost of Capital

Capital Structure Policy

Dividend Policy

Financial Forecasting and Planning

Working Capital Management

International Business Finance

Filters

Exam 20: Corporate Risk Management

Which of the following types of insurance cannot be sold in the United States?

How can a gold futures contract be used as a hedge against a potentially dramatic decrease in the price of the gold needed as an input into the production of computer microprocessors?

If you expect a stock's price to drop,it would be better to sell a call on that stock than to sell a put on it.

As the length of time left until expiration increases,the value of call and put options on the stock also increases.

A(n)________ is a contract that requires the holder to buy or sell a stated commodity at a specified price at a specified time in the future.

There is no actual buying or selling that occurs with a futures contract.

A(n)________ can be exercised only on the expiration date.

A large agribusiness firm has contracted to deliver 100,000 bushels of wheat for $8.50 a bushel at the end of October.On the delivery date,the spot price of wheat is $8.70 per bushel.Which of the following is true?

Which of the following scenarios carries the least risk of NOT being able to meet required payments (capital expenditure,dividend,interest and principal requirements)totaling $96 million?

The price at which the stock or asset may be purchased from (or sold to)the option writer is referred to as:

Workers' compensation insurance provides coverage for on-the-job injuries suffered by employees.

Swenson Oil & Gas allows its customers to prepurchase heating oil in June for the coming winter.Swenson's customers who take advantage of the offer:

What is the value of d2 that should be used when calculating the value of a call option on this stock with the Black- Scholes option pricing model.

Ahmad bought call options on Home Depot with a striking price of $34.The option premium was $3.50.Just before the contract expired,Home Depot stock was $36 per share.Ahmad:

A futures contract is a specialized form of a forward contract distinguished by an organized exchange which encourages confidence in the futures market by allowing for the effective regulation of trading.

Which of the following individual situations would best justify the cost of a life insurance policy?

Uses of future contracts include:

Getting Started-Principles of Finance

Firms and the Financial Market

Understanding Financial Statements, taxes, and Cash Flows

Financial Analysis-Sizing up Firm Performance

Time Value of Money-The Basics

The Time Value of Money-Annuities and Other Topics

An Introduction to Risk and Return-History of Financial Market Returns

Risk and Return-Capital Market Theory

Debt Valuation and Interest Rates

Stock Valuation

Investment Decision Criteria

Analyzing Project Cash Flows

Risk Analysis and Project Evaluation

The Cost of Capital

Capital Structure Policy

Dividend Policy

Financial Forecasting and Planning

Working Capital Management

International Business Finance

Filters

What is the value of d₂that should be used when calculating the value of a call option on this stock with the Black- Scholes option pricing model.