Question 1

The term futures margin refers to

Accepted Answer

A)  the percent of potential margin for profit associated with a futures contract. 
B)  the "good faith" money the purchaser puts down to ensure that the contract will be carried out. 
C)  the interest-earning account associated with a futures contract. 
D)  the number of contracts outstanding on a particular futures contract. 
A)  the percent of potential margin for profit associated with a futures contract. 
B)  the "good faith" money the purchaser puts down to ensure that the contract will be carried out. 
C)  the interest-earning account associated with a futures contract. 
D)  the number of contracts outstanding on a particular futures contract.

Question 2

Futures contracts differ from forward contracts in that

Accepted Answer

A)  they can be used by financial managers to reduce risk. 
B)  they provide their holder with an opportunity to buy or sell an asset at some future time if the asset's value has changed in a manner favorable to the futures contract holder. 
C)  they sustain a small change in value when there is a small change in the price of the underlying commodity. 
D)  they are for standardized commodities in standardized quantities and have standardized expiration dates. 
A)  they can be used by financial managers to reduce risk. 
B)  they provide their holder with an opportunity to buy or sell an asset at some future time if the asset's value has changed in a manner favorable to the futures contract holder. 
C)  they sustain a small change in value when there is a small change in the price of the underlying commodity. 
D)  they are for standardized commodities in standardized quantities and have standardized expiration dates.

Question 3

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 4

Some risks cannot be transferred to other parties.

Accepted Answer

A) True 
 B)False

Question 5

Mayspring Corporation common stock is currently selling for $72.00 per share. A call option on Mayspring Corporation that expires in two months has an exercise price of $72.50. This call option is said to be

Accepted Answer

A)  out-of-the-money. 
B)  at-the-money. 
C)  in-the-money. 
D)  covered. 
A)  out-of-the-money. 
B)  at-the-money. 
C)  in-the-money. 
D)  covered.

Question 6

(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 7

Which of the following features is shared by futures contracts and forward contracts?

Accepted Answer

A)  They are traded on organized exchanges. 
B)  The commodities are standardized. 
C)  The quantities traded are standardized. 
D)  They mature (must be exercised or settled) at a specific date set in the contract. 
A)  They are traded on organized exchanges. 
B)  The commodities are standardized. 
C)  The quantities traded are standardized. 
D)  They mature (must be exercised or settled) at a specific date set in the contract.

Question 8

It is not legal for a corporation to hold life insurance policies on its employees.

Accepted Answer

A) True 
 B)False

Question 9

How should corporations decide when to self insure against certain risks and when to purchase insurance from outside parties?

Accepted Answer

Risks that are a normal part of doing bu

Question 10

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 11

The term open interest refers to the

Accepted Answer

A)  total amount of interest paid on an options margin account. 
B)  number of option contracts in existence at a point in time. 
C)  interest accumulated on a Treasury bond contract. 
D)  striking price of an interest rate swap. 
A)  total amount of interest paid on an options margin account. 
B)  number of option contracts in existence at a point in time. 
C)  interest accumulated on a Treasury bond contract. 
D)  striking price of an interest rate swap.

Question 12

The difference between a stock's current price and the striking price of the option is the minimum value of the option.

Accepted Answer

A) True 
 B)False

Question 13

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.

Question 14

When a party enters into a swap contract it agrees to

Accepted Answer

A)  accept one set of payments in exchange for another. 
B)  exchange principals on loans with different interest rates. 
C)  exchange a loan for a different loan with a different time to maturity. 
D)  swap a debt obligation for an equity obligation. 
A)  accept one set of payments in exchange for another. 
B)  exchange principals on loans with different interest rates. 
C)  exchange a loan for a different loan with a different time to maturity. 
D)  swap a debt obligation for an equity obligation.

Question 15

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

Accepted Answer

A)  decreases, increases 
B)  increases, increases 
C)  decreases, decreases 
D)  increases, decreases 
A)  decreases, increases 
B)  increases, increases 
C)  decreases, decreases 
D)  increases, decreases

Question 16

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 $3.50 per gallon. Swenson hedged its position by contracting to purchase 400,000 gallons of oil for November delivery at a price of $3.00 per gallon. If the November spot price is $2.75 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 17

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 18

Aspects of demand risk controllable by the firm include

Accepted Answer

A)  product quality. 
B)  interest rates. 
C)  entry of external competitors. 
D)  status of the regional and national economy. 
A)  product quality. 
B)  interest rates. 
C)  entry of external competitors. 
D)  status of the regional and national economy.

Question 19

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 euro 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 20

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

Accepted Answer

A) True 
 B)False

The term futures margin refers to

Futures contracts differ from forward contracts in that

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.

Some risks cannot be transferred to other parties.

Mayspring Corporation common stock is currently selling for $72.00 per share. A call option on Mayspring Corporation that expires in two months has an exercise price of $72.50. This call option is said to be

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

Which of the following features is shared by futures contracts and forward contracts?

It is not legal for a corporation to hold life insurance policies on its employees.

How should corporations decide when to self insure against certain risks and when to purchase insurance from outside parties?

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?

The term open interest refers to the

The difference between a stock's current price and the striking price of the option is the minimum value of the option.

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

When a party enters into a swap contract it agrees to

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

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

Aspects of demand risk controllable by the firm include

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

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 term futures margin refers to

Futures contracts differ from forward contracts in that

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.

Some risks cannot be transferred to other parties.

Mayspring Corporation common stock is currently selling for $72.00 per share. A call option on Mayspring Corporation that expires in two months has an exercise price of $72.50. This call option is said to be

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

Which of the following features is shared by futures contracts and forward contracts?

It is not legal for a corporation to hold life insurance policies on its employees.

How should corporations decide when to self insure against certain risks and when to purchase insurance from outside parties?

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?

The term open interest refers to the

The difference between a stock's current price and the striking price of the option is the minimum value of the option.

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

When a party enters into a swap contract it agrees to

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

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

Aspects of demand risk controllable by the firm include

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

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

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