Question 1

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 2

Corporations should spread responsibility for monitoring risk among as many different individuals as possible.

Accepted Answer

A) True 
 B)False

Question 3

The owner of a credit default swap benefits if the underlying security, such as a mortgage loan, defaults.

Accepted Answer

A) True 
 B)False

Question 4

There is only one day per month on which a listed option on any stock can expire.

Accepted Answer

A) True 
 B)False

Question 5

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 6

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

Question 7

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 8

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.

Question 9

A futures contract provides the holder with the option to buy or sell a stated contract involving a commodity or financial claim at a specified price over a stated time period.

Accepted Answer

A) True 
 B)False

Question 10

A call option on a stock is a financial instrument defined by which of the following statements?

Accepted Answer

A)  It obligates the investor holding it to sell the stock at the specified price at the stated date in the future. 
B)  It obligates the investor holding it to buy the stock at the specified price at the stated date in the future. 
C)  It gives the investor holding it the right, but not the obligation, to buy the stock at the specified price at the stated date in the future. 
D)  It gives the investor holding it the right, but not the obligation, to sell the stock at the specified price at the stated date in the future. 
A)  It obligates the investor holding it to sell the stock at the specified price at the stated date in the future. 
B)  It obligates the investor holding it to buy the stock at the specified price at the stated date in the future. 
C)  It gives the investor holding it the right, but not the obligation, to buy the stock at the specified price at the stated date in the future. 
D)  It gives the investor holding it the right, but not the obligation, to sell the stock at the specified price at the stated date in the future.

Question 11

The margin on a futures contract refers to the amount of equity the investor initially paid to purchase the futures contract.

Accepted Answer

A) True 
 B)False

Question 12

Purchasing insurance coverage is not justified in cases where potential losses are unlikely, but potentially catastrophic.

Accepted Answer

A) True 
 B)False

Question 13

A(n) ________ is a financial instrument that can be used to hedge the effect of both favorable and unfavorable price movements.

Accepted Answer

A)  convertible securities 
B)  call option 
C)  put option 
D)  futures contracts 
A)  convertible securities 
B)  call option 
C)  put option 
D)  futures contracts

Question 14

The minimum value of a call option equals

Accepted Answer

A)  exercise price - the stock price. 
B)  stock price - exercise price. 
C)  call premium - (stock price - exercise price). 
D)  put premium - (exercise price - stock price). 
A)  exercise price - the stock price. 
B)  stock price - exercise price. 
C)  call premium - (stock price - exercise price). 
D)  put premium - (exercise price - stock price).

Question 15

You sold one July futures contract of pork bellies at $.59 per lb. One contract represents 40,000 lbs. of pork bellies. By the end of the day, the price had fallen to $.57 per lb. What was your profit or loss for the day?

Accepted Answer

A)  $800 profit 
B)  $356 loss 
C)  $800 loss 
D)  There is no profit or loss until the contract expires. 
A)  $800 profit 
B)  $356 loss 
C)  $800 loss 
D)  There is no profit or loss until the contract expires.

Question 16

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 17

What motivates users of raw materials to hedge future prices by entering into futures contracts? What is the disadvantage of this practice?

Accepted Answer

Users of raw materials who enter into fu

Question 18

Unlike the owner of a(n) ________ contract, the owner of a(n) ________ contract does not have to exercise it

Accepted Answer

A)  put, call 
B)  option, futures 
C)  futures, option 
D)  long, short 
A)  put, call 
B)  option, futures 
C)  futures, option 
D)  long, short

Question 19

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

Question 20

What are the rights and obligations of the buyer and the seller of a call option on common stock?

Accepted Answer

The buyer of a call option has the right

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

Corporations should spread responsibility for monitoring risk among as many different individuals as possible.

The owner of a credit default swap benefits if the underlying security, such as a mortgage loan, defaults.

There is only one day per month on which a listed option on any stock can expire.

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.

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

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

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

A futures contract provides the holder with the option to buy or sell a stated contract involving a commodity or financial claim at a specified price over a stated time period.

A call option on a stock is a financial instrument defined by which of the following statements?

The margin on a futures contract refers to the amount of equity the investor initially paid to purchase the futures contract.

Purchasing insurance coverage is not justified in cases where potential losses are unlikely, but potentially catastrophic.

A(n) ________ is a financial instrument that can be used to hedge the effect of both favorable and unfavorable price movements.

The minimum value of a call option equals

You sold one July futures contract of pork bellies at $.59 per lb. One contract represents 40,000 lbs. of pork bellies. By the end of the day, the price had fallen to $.57 per lb. What was your profit or loss for the day?

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.

What motivates users of raw materials to hedge future prices by entering into futures contracts? What is the disadvantage of this practice?

Unlike the owner of a(n) contract, the owner of a(n) contract does not have to exercise it

What are the rights and obligations of the buyer and the seller of a call option on common stock?

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

Corporations should spread responsibility for monitoring risk among as many different individuals as possible.

The owner of a credit default swap benefits if the underlying security, such as a mortgage loan, defaults.

There is only one day per month on which a listed option on any stock can expire.

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.

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

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

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

A futures contract provides the holder with the option to buy or sell a stated contract involving a commodity or financial claim at a specified price over a stated time period.

A call option on a stock is a financial instrument defined by which of the following statements?

The margin on a futures contract refers to the amount of equity the investor initially paid to purchase the futures contract.

Purchasing insurance coverage is not justified in cases where potential losses are unlikely, but potentially catastrophic.

A(n) ________ is a financial instrument that can be used to hedge the effect of both favorable and unfavorable price movements.

The minimum value of a call option equals

You sold one July futures contract of pork bellies at $.59 per lb. One contract represents 40,000 lbs. of pork bellies. By the end of the day, the price had fallen to $.57 per lb. What was your profit or loss for the day?

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.

What motivates users of raw materials to hedge future prices by entering into futures contracts? What is the disadvantage of this practice?

Unlike the owner of a(n) ________ contract, the owner of a(n) ________ contract does not have to exercise it

What are the rights and obligations of the buyer and the seller of a call option on common stock?

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

Unlike the owner of a(n) contract, the owner of a(n) contract does not have to exercise it