Question 1

What is the general rule that firms should follow when deciding how much risk to assume?

Accepted Answer

Unfortunately,there is no such rule.Exce

Question 2

A major factor impacting the demand for residential real estate is the availability of credit.

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

A manufacturer of breakfast cereals should always be fully hedged against both rising and falling grain prices.

Accepted Answer

A) True 
 B)False

Question 5

Annika has purchased put options on 1000 shares of Amazon stock with a striking price of $170 per share.The option premium was $6.00 per share.
a.Compute Annika's profit or loss if the market value of Amazon's stock is $180 at expiration.
b.Compute Annika's profit or loss if the market value of Amazon's stock is $160 at expiration.
c.Compute Annika's profit or loss if the market value of Amazon's stock is $172 at expiration.

Accepted Answer

a.The option will not be exercised becau

Question 6

Hudson Valley Distributors wants to be sure it has 10,000 cases of Beaujolais Nouveau to sell next November.In January,they enters into an agreement to buy the wine at a price of 30 euros to the case.Payment will be due at the end of November.They expect to sell the wine to restaurants and retailers for $63 per case.If Hudson Valley does not hedge its position and the exchange rate in November is $1.50 /euro,what is the gross profit on the wine?

Accepted Answer

A) $180,000 
B) ($180,000) 
C) $330,000 
D) $150,000 
A) $180,000 
B) ($180,000) 
C) $330,000 
D) $150,000

Question 7

A swap is generally structured so that no money initially changes hands.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following types of insurance does NOT involve a contract with an external party?

Accepted Answer

A) Property insurance 
B) Life insurance 
C) Directors and officers insurance 
D) Self insurance 
A) Property insurance 
B) Life insurance 
C) Directors and officers insurance 
D) Self insurance

Question 9

A futures contract is a specialized form of a forward contract distinguished by a(n):

Accepted Answer

A) organized exchange. 
B) standardized contract with unlimited price changes and margin requirements. 
C) clearinghouse in each futures market. 
D) both A and C. 
A) organized exchange. 
B) standardized contract with unlimited price changes and margin requirements. 
C) clearinghouse in each futures market. 
D) both A and C.

Question 10

Bowman-Daniela-Mainland is a major producer and exporter of agricultural commodities.It has sold soy beans for future delivery to a Japanese firm and expects to receive payments of 400 million yen in 6 months and another 400 million yen in 1 year.To lock in the exchange rates on these two payments,BDM arranges forward contracts with an investment banker to sell 400 million yen at $0.0110 in 6 months and $0.0115 in 1 year.What will BDM's cash flow be in dollars from each of these transactions? How has it fixed its revenue in dollars from the soy bean sales?

Accepted Answer

BDM will receive $0.0110 × 400,000,000 =

Question 11

Ahmad bought put options on Verizon with a striking price of $32.The option premium was $2.50.Just before the contract expired,Verizon stock 30.50 per share.Ahmad:

Accepted Answer

A) made a profit of $1.50 per share. 
B) lost $2.50 per share because the option would not be exercised. 
C) lost $0.50 per share. 
D) lost $1.50 per share. 
A) made a profit of $1.50 per share. 
B) lost $2.50 per share because the option would not be exercised. 
C) lost $0.50 per share. 
D) lost $1.50 per share.

Question 12

The popularity of options can be explained by the use of options:

Accepted Answer

A) in writing future contracts. 
B) as a type of financial insurance. 
C) to expand the set of possible investment alternatives available. 
D) both B and C. 
E) all of the above. 
A) in writing future contracts. 
B) as a type of financial insurance. 
C) to expand the set of possible investment alternatives available. 
D) both B and C. 
E) all of the above.

Question 13

The objective of a prudent financial manager is to eliminate all foreign exchange risk.

Accepted Answer

A) True 
 B)False

Question 14

As the volatility of a stock's price increases,the value of call and put options on the stock decreases.

Accepted Answer

A) True 
 B)False

Question 15

A firm agrees to accept annual payments on a $1,000,000 loan with a fixed interest rate of 8% in exchange for making the annual payments on a loan with floating rate payments based on LIBOR.Payments are interest only with principal due in 10 years.If LIBOR falls to 7%,the firm's net cash flow will be:

Accepted Answer

A) $70,000. 
B) ($10,000). 
C) $10,000. 
D) $80,000. 
A) $70,000. 
B) ($10,000). 
C) $10,000. 
D) $80,000.

Question 16

Assume that the current price of DEY stock is $25,that a 6 month call option on the stock has a strike or exercise price of $27.50,the risk free rate is 4%,and that you have calculated N(d1)as .5476 and N(d2)as .4432.Use the Black-Scholes model to calculate the price of the option.

Accepted Answer

A) $1.74 
B) $4.20 
C) 1.98 
D) $2.50 
A) $1.74 
B) $4.20 
C) 1.98 
D) $2.50

Question 17

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,Swenson's gross profit on the heating oil sold in June will be

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 18

What is the value of d1 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 19

A call option gives its owner the right to sell a given number of shares or some other asset at a specified price over a given period.

Accepted Answer

A) True 
 B)False

Question 20

Barco Corp.common stock is currently selling for $36.50.A call option on Barco stock costs $.75 per share on a normal contract of 100 shares.This option has an exercise price of $39 and expires in one month.What is the minimum value of this option?

Accepted Answer

A) $2.50 
B) $75 
C) $0 
D) $36.50 
A) $2.50 
B) $75 
C) $0 
D) $36.50

What is the general rule that firms should follow when deciding how much risk to assume?

A major factor impacting the demand for residential real estate is the availability of credit.

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

A manufacturer of breakfast cereals should always be fully hedged against both rising and falling grain prices.

A swap is generally structured so that no money initially changes hands.

Which of the following types of insurance does NOT involve a contract with an external party?

A futures contract is a specialized form of a forward contract distinguished by a(n):

Ahmad bought put options on Verizon with a striking price of $32.The option premium was $2.50.Just before the contract expired,Verizon stock 30.50 per share.Ahmad:

The popularity of options can be explained by the use of options:

The objective of a prudent financial manager is to eliminate all foreign exchange risk.

As the volatility of a stock's price increases,the value of call and put options on the stock decreases.

Assume that the current price of DEY stock is $25,that a 6 month call option on the stock has a strike or exercise price of $27.50,the risk free rate is 4%,and that you have calculated N(d₁)as .5476 and N(d2)as .4432.Use the Black-Scholes model to calculate the price of the option.

What is the value of d₁that should be used when calculating the value of a call option on this stock with the Black- Scholes option pricing model.

A call option gives its owner the right to sell a given number of shares or some other asset at a specified price over a given period.

Barco Corp.common stock is currently selling for $36.50.A call option on Barco stock costs $.75 per share on a normal contract of 100 shares.This option has an exercise price of $39 and expires in one month.What is the minimum value of this option?

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

What is the general rule that firms should follow when deciding how much risk to assume?

A major factor impacting the demand for residential real estate is the availability of credit.

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

A manufacturer of breakfast cereals should always be fully hedged against both rising and falling grain prices.

A swap is generally structured so that no money initially changes hands.

Which of the following types of insurance does NOT involve a contract with an external party?

A futures contract is a specialized form of a forward contract distinguished by a(n):

Ahmad bought put options on Verizon with a striking price of $32.The option premium was $2.50.Just before the contract expired,Verizon stock 30.50 per share.Ahmad:

The popularity of options can be explained by the use of options:

The objective of a prudent financial manager is to eliminate all foreign exchange risk.

As the volatility of a stock's price increases,the value of call and put options on the stock decreases.

Assume that the current price of DEY stock is $25,that a 6 month call option on the stock has a strike or exercise price of $27.50,the risk free rate is 4%,and that you have calculated N(d1)as .5476 and N(d2)as .4432.Use the Black-Scholes model to calculate the price of the option.

What is the value of d1 that should be used when calculating the value of a call option on this stock with the Black- Scholes option pricing model.

A call option gives its owner the right to sell a given number of shares or some other asset at a specified price over a given period.

Barco Corp.common stock is currently selling for $36.50.A call option on Barco stock costs $.75 per share on a normal contract of 100 shares.This option has an exercise price of $39 and expires in one month.What is the minimum value of this option?

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

Assume that the current price of DEY stock is $25,that a 6 month call option on the stock has a strike or exercise price of $27.50,the risk free rate is 4%,and that you have calculated N(d₁)as .5476 and N(d2)as .4432.Use the Black-Scholes model to calculate the price of the option.

What is the value of d₁that should be used when calculating the value of a call option on this stock with the Black- Scholes option pricing model.