Question 1

The major risks assumed by firms include

Accepted Answer

A) demand risk. 
B) foreign-exchange risk. 
C) operational risk. 
D) all of the above. 
A) demand risk. 
B) foreign-exchange risk. 
C) operational risk. 
D) all of the above.

Question 2

Ahmad bought put options on Verizon with a striking price of $50.The option premium was $2.64.Just before the contract expired,Verizon stock was at 51.39 per share.Ahmad

Accepted Answer

A) made a profit of $1.39 per share. 
B) lost $2.64 per share because the option would not be exercised. 
C) lost $1.39 per share. 
D) lost $1.20 per share. 
A) made a profit of $1.39 per share. 
B) lost $2.64 per share because the option would not be exercised. 
C) lost $1.39 per share. 
D) lost $1.20 per share.

Question 3

Hudson Valley Distributors wants to be sure it has 10,000 cases of Beaujolais Nouveau to sell next November.In January,they enter into an agreement to buy the wine at a price of 34.62 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 $1.25/euro,the payoff to Hudson Valley for hedging is

Accepted Answer

A) $13,315. 
B) $17,310. 
C) ($17,310). 
D) ($500). 
A) $13,315. 
B) $17,310. 
C) ($17,310). 
D) ($500).

Question 4

(Business of Life)What guidelines should determine whether or not an individual should buy life insurance?

Accepted Answer

The real question is "Who needs to be pr

Question 5

Ahmad bought call options on Home Depot with a striking price of $80.The option premium was $3.82.Just before the contract expired,Home Depot stock was $82 per share.Ahmad

Accepted Answer

A) made a profit of $2.00 per share. 
B) lost $3.82 per share because the option would not be exercised. 
C) made a profit of $3.82 per share. 
D) lost $1.82 per share. 
A) made a profit of $2.00 per share. 
B) lost $3.82 per share because the option would not be exercised. 
C) made a profit of $3.82 per share. 
D) lost $1.82 per share.

Question 6

Self-insurance would not provide adequate protection in which of the following circumstances?

Accepted Answer

A) Unemployment insurance for a firm that rarely lays off employees. 
B) Damage to the company's own vehicles. 
C) Major ecological disasters resulting from oil spills. 
D) Revenue lost because of bad weather during the peak shopping season. 
A) Unemployment insurance for a firm that rarely lays off employees. 
B) Damage to the company's own vehicles. 
C) Major ecological disasters resulting from oil spills. 
D) Revenue lost because of bad weather during the peak shopping season.

Question 7

Workers' compensation insurance protects employees income in case they are laid off or fired.

Accepted Answer

A) True 
 B)False

Question 8

Foreign-exchange risk can be important even for firms that have only U.S.operations.

Accepted Answer

A) True 
 B)False

Question 9

Erin wrote a put option on Verizon stock with a striking price of $53 price per share.At the expiration date,Verizon was selling for $50 per share.Which statement best describes the course of action that Erin should or must take?

Accepted Answer

A) Erin will do nothing because the market price is lower than the striking price. 
B) Erin is obliged to buy the Verizon shares at $53,even though the market price is $3.00 lower. 
C) Erin must sell the Verizon stock for $53 per share. 
D) Erin has the right to sell Verizon stock at $3.00 per share over the market price. 
A) Erin will do nothing because the market price is lower than the striking price. 
B) Erin is obliged to buy the Verizon shares at $53,even though the market price is $3.00 lower. 
C) Erin must sell the Verizon stock for $53 per share. 
D) Erin has the right to sell Verizon stock at $3.00 per share over the market price.

Question 10

Which of the following should determine whether or not the firm should purchase insurance from an outside party?

Accepted Answer

A) Only the frequency of incidents 
B) The cost of the policy and the expected losses 
C) Only the maximum size of incidents 
D) Only the firms normal cash reserves 
A) Only the frequency of incidents 
B) The cost of the policy and the expected losses 
C) Only the maximum size of incidents 
D) Only the firms normal cash reserves

Question 11

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 12

Eliminating all possible risk will ultimately

Accepted Answer

A) guarantee the highest possible cash flow over the long run. 
B) cancel out all profits with cost of hedging. 
C) result in lower expected cash flow but the highest cash flow for the worst case scenario. 
D) guarantee that the firm will not experience losses. 
A) guarantee the highest possible cash flow over the long run. 
B) cancel out all profits with cost of hedging. 
C) result in lower expected cash flow but the highest cash flow for the worst case scenario. 
D) guarantee that the firm will not experience losses.

Question 13

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 14

Use the following information to answer the following question(s).
Valuing a call option using the Black-Scholes model:
Current price of ABZ stock = $50
Exercise or strike price of the call option = $48
The maturity of the option is 0.5 years
The annualized variance in the returns on the stock is .20
The risk free rate of interest is 3% per annum
-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

Assume that the current price of FGX stock is $33,that a 6 month call option on the stock has a strike or exercise price of $35.00,the risk free rate is 4%,and that you have calculated N(d1)as .65 and N(d2)as .55.Use the Black-Scholes model to calculate the price of the option.

Accepted Answer

$33(.65)-

Question 16

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 34.62 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 $1.35/euro,Hudson Valley's gross profit will be

Accepted Answer

A) $283,800. 
B) $138,415. 
C) $162,630. 
D) $179,940. 
A) $283,800. 
B) $138,415. 
C) $162,630. 
D) $179,940.

Question 17

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 18

The party that agrees to sell a commodity or currency in the forward market is said to have a

Accepted Answer

A) long position. 
B) short position. 
C) protected position. 
D) split position. 
A) long position. 
B) short position. 
C) protected position. 
D) split position.

Question 19

The greater a firm's dividend payout,the ________ likely it is that the stock's price will rise above the exercise price.

Accepted Answer

A) less 
B) more 
C) dividends have no effect on the stock's future price 
D) The answer depends on the risk-free rate. 
A) less 
B) more 
C) dividends have no effect on the stock's future price 
D) The answer depends on the risk-free rate.

Question 20

A commodity such as diesel fuel for which there is no available futures contract might be satisfactorily hedged with

Accepted Answer

A) stock index futures. 
B) interest rate futures. 
C) heating oil futures. 
D) electricity futures. 
A) stock index futures. 
B) interest rate futures. 
C) heating oil futures. 
D) electricity futures.

The major risks assumed by firms include

Ahmad bought put options on Verizon with a striking price of $50.The option premium was $2.64.Just before the contract expired,Verizon stock was at 51.39 per share.Ahmad

(Business of Life)What guidelines should determine whether or not an individual should buy life insurance?

Ahmad bought call options on Home Depot with a striking price of $80.The option premium was $3.82.Just before the contract expired,Home Depot stock was $82 per share.Ahmad

Self-insurance would not provide adequate protection in which of the following circumstances?

Workers' compensation insurance protects employees income in case they are laid off or fired.

Foreign-exchange risk can be important even for firms that have only U.S.operations.

Erin wrote a put option on Verizon stock with a striking price of $53 price per share.At the expiration date,Verizon was selling for $50 per share.Which statement best describes the course of action that Erin should or must take?

Which of the following should determine whether or not the firm should purchase insurance from an outside party?

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

Eliminating all possible risk will ultimately

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

Assume that the current price of FGX stock is $33,that a 6 month call option on the stock has a strike or exercise price of $35.00,the risk free rate is 4%,and that you have calculated N(d₁)as .65 and N(d2)as .55.Use the Black-Scholes model to calculate the price of the option.

An example of commodity risk would be

The party that agrees to sell a commodity or currency in the forward market is said to have a

The greater a firm's dividend payout,the ________ likely it is that the stock's price will rise above the exercise price.

A commodity such as diesel fuel for which there is no available futures contract might be satisfactorily hedged with

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

The major risks assumed by firms include

Ahmad bought put options on Verizon with a striking price of $50.The option premium was $2.64.Just before the contract expired,Verizon stock was at 51.39 per share.Ahmad

(Business of Life)What guidelines should determine whether or not an individual should buy life insurance?

Ahmad bought call options on Home Depot with a striking price of $80.The option premium was $3.82.Just before the contract expired,Home Depot stock was $82 per share.Ahmad

Self-insurance would not provide adequate protection in which of the following circumstances?

Workers' compensation insurance protects employees income in case they are laid off or fired.

Foreign-exchange risk can be important even for firms that have only U.S.operations.

Erin wrote a put option on Verizon stock with a striking price of $53 price per share.At the expiration date,Verizon was selling for $50 per share.Which statement best describes the course of action that Erin should or must take?

Which of the following should determine whether or not the firm should purchase insurance from an outside party?

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

Eliminating all possible risk will ultimately

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

Assume that the current price of FGX stock is $33,that a 6 month call option on the stock has a strike or exercise price of $35.00,the risk free rate is 4%,and that you have calculated N(d1)as .65 and N(d2)as .55.Use the Black-Scholes model to calculate the price of the option.

An example of commodity risk would be

The party that agrees to sell a commodity or currency in the forward market is said to have a

The greater a firm's dividend payout,the ________ likely it is that the stock's price will rise above the exercise price.

A commodity such as diesel fuel for which there is no available futures contract might be satisfactorily hedged with

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 FGX stock is $33,that a 6 month call option on the stock has a strike or exercise price of $35.00,the risk free rate is 4%,and that you have calculated N(d₁)as .65 and N(d2)as .55.Use the Black-Scholes model to calculate the price of the option.