Question 1

Well managed firms will always seek to transfer as much risk as possible.

Accepted Answer

A) True 
 B)False

Question 2

An investor would buy a ________ if he or she believes that the price of the underlying stock or asset will fall in the near future.

Accepted Answer

A) call option 
B) convertible bond 
C) put option 
D) futures contract to take delivery of an asset at a future date 
A) call option 
B) convertible bond 
C) put option 
D) futures contract to take delivery of an asset at a future date

Question 3

An options contract gives its owner the right to buy or sell a fixed number of shares at a specified price over a limited time period.

Accepted Answer

A) True 
 B)False

Question 4

Directors and officers insurance protects the company if key personnel die or leave the firm for other opportunities.

Accepted Answer

A) True 
 B)False

Question 5

Swenson Oil & Gas allows its customers to prepurchase heating oil in June for the coming winter.If Swenson does not hedge its positions in the futures market:

Accepted Answer

A) it could make unexpected profits if fuel prices decline. 
B) it could suffer large losses if the wholesale cost of fuel rises above the price it sold the fuel for in June. 
C) it will make normal profits if winter prices do not change very much from the June spot price. 
D) all of the above. 
A) it could make unexpected profits if fuel prices decline. 
B) it could suffer large losses if the wholesale cost of fuel rises above the price it sold the fuel for in June. 
C) it will make normal profits if winter prices do not change very much from the June spot price. 
D) all of the above.

Question 6

Which of the following scenarios carries the greatest 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 7

A firm agrees to accept payments on a $1,000,000 loan with a fixed interest rate of 8% in exchange for making the payments on a loan with floating rate payments based on LIBOR.Payments are interest only with principal due in 10 years.The firm will benefit:

Accepted Answer

A) if LIBOR falls. 
B) if LIBOR rises . 
C) if Libor remains unchanged. 
D) if LiIBOR fluctuates randomly. 
A) if LIBOR falls. 
B) if LIBOR rises . 
C) if Libor remains unchanged. 
D) if LiIBOR fluctuates randomly.

Question 8

Assume that N(d1)= .63105 and N(d2) = .50735.Compute the value of the call option using the Black -Scholes option pricing model.

Accepted Answer

A) $23.99 
B) $7.56 
C) $7.20 
D) $2.00 
A) $23.99 
B) $7.56 
C) $7.20 
D) $2.00

Question 9

Which of the following is NOT an advantage of futures contracts?

Accepted Answer

A) They are inexpensive compared to customized forward contracts. 
B) They trade on exchanges rather than over the counter. 
C) Features such as contract size and expiration date are standardized. 
D) The size and commodity can always be perfectly tailored to form a perfect hedge. 
A) They are inexpensive compared to customized forward contracts. 
B) They trade on exchanges rather than over the counter. 
C) Features such as contract size and expiration date are standardized. 
D) The size and commodity can always be perfectly tailored to form a perfect hedge.

Question 10

What are the major variables in the Black-Scholes option pricing model and in what direction do they influence the price of call options?

Accepted Answer

All things equal,the value of a call inc

Question 11

Open interest provides the investor with some indication of the amount of liquidity associated with a particular option.

Accepted Answer

A) True 
 B)False

Question 12

An example of commodity risk would be:

Accepted Answer

A) volatile exchange rates with countries from which commodities are imported. 
B) the price of copper for electrical contractors. 
C) volatile exchange rates with countries to which commodities are exported. 
D) raw materials that do not meet quality specifications. 
A) volatile exchange rates with countries from which commodities are imported. 
B) the price of copper for electrical contractors. 
C) volatile exchange rates with countries to which commodities are exported. 
D) raw materials that do not meet quality specifications.

Question 13

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.Hudson Valley has hedged its foreign exchange risk by entering into a forward contract to purchase euros in November at $1.30/euro.If the spot exchange rate at the end of November is $1.50/euro,the payoff to Hudson Valley for hedging is ________.

Accepted Answer

A) $180,000 
B) ($60,000) 
C) $60,000 
D) $240,000 
A) $180,000 
B) ($60,000) 
C) $60,000 
D) $240,000

Question 14

Currency swaps allow the financial manager to hedge exchange rate risk over shorter periods than options and futures contracts.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following is a vehicle for controlling exchange rate risk?

Accepted Answer

A) The purchase of a cross-rate index 
B) The purchase of a LEAP 
C) The purchase of a spot-rate index 
D) A currency swap 
A) The purchase of a cross-rate index 
B) The purchase of a LEAP 
C) The purchase of a spot-rate index 
D) A currency swap

Question 16

Futures and currency swaps eliminate unfavorable price movements,whereas options can be used to eliminate the effect of both favorable and unfavorable price movements.

Accepted Answer

A) True 
 B)False

Question 17

The optimal corporate risk management strategy is to:

Accepted Answer

A) avoid or transfer every possible risk. 
B) do nothing to transfer risk. 
C) transfer about half the risk. 
D) there is no strategy that is optimal for all firms. 
A) avoid or transfer every possible risk. 
B) do nothing to transfer risk. 
C) transfer about half the risk. 
D) there is no strategy that is optimal for all firms.

Question 18

Which of the following types of risk cannot typically be transferred to an insurance company?

Accepted Answer

A) Losses due to property damage from storms. 
B) Losses due to on-the job injuries suffered by employees. 
C) Losses due to rising raw materials costs that cannot be passed on to customers. 
D) Losses due to the untimely death of an employee in a key position. 
A) Losses due to property damage from storms. 
B) Losses due to on-the job injuries suffered by employees. 
C) Losses due to rising raw materials costs that cannot be passed on to customers. 
D) Losses due to the untimely death of an employee in a key position.

Question 19

One of the most popular swaps is the interest rate swap.

Accepted Answer

A) True 
 B)False

Question 20

The owner of a large,diversified stock portfolio could hedge against a steep decline in prices by:

Accepted Answer

A) buying call options on a stock index. 
B) buying put options on a stock index. 
C) selling put options on a stock index. 
D) buying both call and put options with the same expiration date. 
A) buying call options on a stock index. 
B) buying put options on a stock index. 
C) selling put options on a stock index. 
D) buying both call and put options with the same expiration date.

Well managed firms will always seek to transfer as much risk as possible.

An investor would buy a ________ if he or she believes that the price of the underlying stock or asset will fall in the near future.

An options contract gives its owner the right to buy or sell a fixed number of shares at a specified price over a limited time period.

Directors and officers insurance protects the company if key personnel die or leave the firm for other opportunities.

Swenson Oil & Gas allows its customers to prepurchase heating oil in June for the coming winter.If Swenson does not hedge its positions in the futures market:

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

A firm agrees to accept payments on a $1,000,000 loan with a fixed interest rate of 8% in exchange for making the payments on a loan with floating rate payments based on LIBOR.Payments are interest only with principal due in 10 years.The firm will benefit:

Assume that N(d₁)=.63105andN(d₂)= .50735.Compute the value of the call option using the Black -Scholes option pricing model.

Which of the following is NOT an advantage of futures contracts?

What are the major variables in the Black-Scholes option pricing model and in what direction do they influence the price of call options?

Open interest provides the investor with some indication of the amount of liquidity associated with a particular option.

An example of commodity risk would be:

Currency swaps allow the financial manager to hedge exchange rate risk over shorter periods than options and futures contracts.

Which of the following is a vehicle for controlling exchange rate risk?

Futures and currency swaps eliminate unfavorable price movements,whereas options can be used to eliminate the effect of both favorable and unfavorable price movements.

The optimal corporate risk management strategy is to:

Which of the following types of risk cannot typically be transferred to an insurance company?

One of the most popular swaps is the interest rate swap.

The owner of a large,diversified stock portfolio could hedge against a steep decline in prices by:

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

Well managed firms will always seek to transfer as much risk as possible.

An investor would buy a ________ if he or she believes that the price of the underlying stock or asset will fall in the near future.

An options contract gives its owner the right to buy or sell a fixed number of shares at a specified price over a limited time period.

Directors and officers insurance protects the company if key personnel die or leave the firm for other opportunities.

Swenson Oil & Gas allows its customers to prepurchase heating oil in June for the coming winter.If Swenson does not hedge its positions in the futures market:

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

A firm agrees to accept payments on a $1,000,000 loan with a fixed interest rate of 8% in exchange for making the payments on a loan with floating rate payments based on LIBOR.Payments are interest only with principal due in 10 years.The firm will benefit:

Assume that N(d1)= .63105 and N(d2) = .50735.Compute the value of the call option using the Black -Scholes option pricing model.

Which of the following is NOT an advantage of futures contracts?

What are the major variables in the Black-Scholes option pricing model and in what direction do they influence the price of call options?

Open interest provides the investor with some indication of the amount of liquidity associated with a particular option.

An example of commodity risk would be:

Currency swaps allow the financial manager to hedge exchange rate risk over shorter periods than options and futures contracts.

Which of the following is a vehicle for controlling exchange rate risk?

Futures and currency swaps eliminate unfavorable price movements,whereas options can be used to eliminate the effect of both favorable and unfavorable price movements.

The optimal corporate risk management strategy is to:

Which of the following types of risk cannot typically be transferred to an insurance company?

One of the most popular swaps is the interest rate swap.

The owner of a large,diversified stock portfolio could hedge against a steep decline in prices by:

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 N(d₁)=.63105andN(d₂)= .50735.Compute the value of the call option using the Black -Scholes option pricing model.