Question 1

The swap is the arrangement by two counterparties to exchange one stream of cash flow for another.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following is least responsible for the success of futures exchanges such as the Winnipeg Commodity Exchange?

Accepted Answer

A)  Guaranteed settlement. 
B)  Standardized contracts. 
C)  Reduction of hedging costs through marking to market. 
D)  Variety of settlement dates.

Question 3

The typical sequence of cash flows in a futures contract is:

Accepted Answer

A)  purchase price plus a margin account up front, differences are settled at expiration. 
B)  margin account up front, differences are posted daily and settled in cash if margin drops too low. 
C)  margin account up front, all differences settled at expiration. 
D)  all funds are paid at expiration of the contract.

Question 4

Most actively traded forward contracts are written on:

Accepted Answer

A)  U.S. Treasury bills. 
B)  Standard & Poor's index. 
C)  Wheat contracts. 
D)  Foreign currencies.

Question 5

Consolidated Bakeries needs to acquire 100,000 bushels of wheat each quarter.The spot price is $3.75 per bushel but is expected to increase.Consolidated can purchase call options on 5,000 bushels of wheat with a strike price of $3.80 per bushel and a premium of $.03 per bushel.Calculate total expected savings from purchasing the options if wheat is forecasted to sell at $3.90 per bushel in three months.Conversely,how much did it cost to hedge if the wheat price is unchanged in three months?

Accepted Answer

The answer of Consolidated Bakeries needs to acquire 100,000 bushels...

Question 6

A farmer who sells a futures contract is betting that prices will _____ at the expiration of the contract.

Accepted Answer

A)  Decrease 
B)  Increase 
C)  Remain constant 
D)  Guarantee high profits

Question 7

How does a soybean farmer lock in a price of $5.40 per bushel when the cash price at harvest is only $4.90?

Accepted Answer

A)  Profit in futures market to offset loss in cash market by selling futures contract at $5.40/bushel. 
B)  Break even in both markets by buying a futures contract at $5.40/bushel. 
C)  Profit in cash market to offset loss in futures market by buying futures contract at $5.40/bushel. 
D)  Break even in both markets by selling a futures contract at $5.40/bushel.

Question 8

What is an interest-rate swap,and what might motivate a borrower to arrange for one with a bank?

Accepted Answer

The answer of What is an interest-rate swap,and what might...

Question 9

A farmer can avoid delivery on a futures contract by buying an offsetting futures contract.

Accepted Answer

A) True 
 B)False

Question 10

The effect of marking a futures contract to market is similar to:

Accepted Answer

A)  requiring daily payments from the contract buyer. 
B)  requiring daily payments from the contract seller. 
C)  closing the current position and opening a new position daily. 
D)  imposing a daily fee on both buyers and sellers.

Question 11

What is the basic difference in strategy between buying and selling a futures contract?

Accepted Answer

The answer of What is the basic difference in strategy...

Question 12

A gasoline distributor buys a gasoline futures contract that requires acceptance of 42,000 gallons of gasoline at $0.94 per gallon.How is the account marked to market if gasoline futures close the next day at $0.97?

Accepted Answer

A)  A loss of $1,260 is posted to the account. 
B)  A gain of $1,260 is posted to the account. 
C)  A loss of $12,600 is posted to the account. 
D)  A gain of $12,600 is posted to the account.

Question 13

Regarding the profitability of options,it is impossible for a producer who sells put options to lose more than the price of the option premium.

Accepted Answer

A) True 
 B)False

Question 14

What happens to the price of a futures contract as expiration draws closer?

Accepted Answer

A)  It exceeds the spot price of the asset. 
B)  It is exceeded by the spot price of the asset. 
C)  It approaches the spot price of the asset. 
D)  There is no relationship between futures price and spot price as the contract approaches expiration.

Question 15

A farmer hedged his risk by buying put options on wheat with an exercise price of $2.70 at a price of $0.14 per bushel.If the price of wheat at the expiration of the contract is $2.70,what is the net revenue from each bushel of wheat?

Accepted Answer

A)  $2.56 
B)  $2.63 
C)  $2.70 
D)  $2.84

Question 16

Suppose that three days after taking out the futures contracts the price of September canola increases from $610 to $640 a tonne.What additional payments will be made by or to the farmer and the oil processor? What will be their remaining obligations at the end of this third day?

Accepted Answer

The answer of Suppose that three days after taking out...

Question 17

ABC Corp.entered into a currency swap with its bank,providing that ABC borrows $5 million at 10 percent and swaps for a 12 percent yen loan.The spot exchange rate is ¥105/$.If interest only is to be repaid on an annual basis,how much does ABC pay annually to the bank? (answer in millions)

Accepted Answer

A)  ¥1.26 million 
B)  ¥5.71 million 
C)  ¥52.50 million 
D)  ¥63.00 million

Question 18

What form of hedging would you suggest for a producer that wishes to be protected from future price decreases but wants to benefit from any future price increases?

Accepted Answer

A)  Buy a call option on the asset. 
B)  Sell a call option on the asset. 
C)  Buy a put option on the asset. 
D)  Sell a put option on the asset.

Question 19

The activities of speculators are necessary in the futures markets in order to:

Accepted Answer

A)  prevent hedgers from trading options. 
B)  provide a continual stream of profit to hedgers. 
C)  maintain futures prices at appropriate levels. 
D)  understand the direction of future price changes.

Question 20

A speculator takes a position in the futures market without holding an offsetting position in the commodity market.

Accepted Answer

A) True 
 B)False

Exam 26: Risk Management

The swap is the arrangement by two counterparties to exchange one stream of cash flow for another.

Which of the following is least responsible for the success of futures exchanges such as the Winnipeg Commodity Exchange?

The typical sequence of cash flows in a futures contract is:

Most actively traded forward contracts are written on:

A farmer who sells a futures contract is betting that prices will _____ at the expiration of the contract.

How does a soybean farmer lock in a price of $5.40 per bushel when the cash price at harvest is only $4.90?

What is an interest-rate swap,and what might motivate a borrower to arrange for one with a bank?

A farmer can avoid delivery on a futures contract by buying an offsetting futures contract.

The effect of marking a futures contract to market is similar to:

What is the basic difference in strategy between buying and selling a futures contract?

A gasoline distributor buys a gasoline futures contract that requires acceptance of 42,000 gallons of gasoline at $0.94 per gallon.How is the account marked to market if gasoline futures close the next day at $0.97?

Regarding the profitability of options,it is impossible for a producer who sells put options to lose more than the price of the option premium.

What happens to the price of a futures contract as expiration draws closer?

A farmer hedged his risk by buying put options on wheat with an exercise price of $2.70 at a price of $0.14 per bushel.If the price of wheat at the expiration of the contract is $2.70,what is the net revenue from each bushel of wheat?

Suppose that three days after taking out the futures contracts the price of September canola increases from $610 to $640 a tonne.What additional payments will be made by or to the farmer and the oil processor? What will be their remaining obligations at the end of this third day?

ABC Corp.entered into a currency swap with its bank,providing that ABC borrows $5 million at 10 percent and swaps for a 12 percent yen loan.The spot exchange rate is ¥105/$.If interest only is to be repaid on an annual basis,how much does ABC pay annually to the bank? (answer in millions)

What form of hedging would you suggest for a producer that wishes to be protected from future price decreases but wants to benefit from any future price increases?

The activities of speculators are necessary in the futures markets in order to:

A speculator takes a position in the futures market without holding an offsetting position in the commodity market.