Question 1

A commodity producer can place a floor on its revenues by selling put options on the commodity.

Accepted Answer

A) True 
 B)False

Question 2

A milling company buys a futures contract that requires it to take delivery of 5,000 bushels of wheat at a price of $6.75 per bushel.Next day the price of the future is $6.80.The miller:

Accepted Answer

A)  must pay an extra $0.05 a bushel into its margin account. 
B)  can withdraw $0.05 from its margin account. 
C)  does not need to do anything until the contract matures. 
D)  can't say without knowing what happened to the spot price.

Question 3

Insurance is often an effective way to reduce risk when the insurance company can spread its risk over many different policies.

Accepted Answer

A) True 
 B)False

Question 4

Yesterday you sold six-month futures on the S&P index at a price of 2,100.Today the index closed at 2,050 and the future at 2,140.You get a call from your broker.Is he:

Accepted Answer

A)  asking you to pay $40 times the contract size into your margin account? 
B)  asking you to pay $50 times the contract size into your margin account? 
C)  telling you that you can withdraw $40 times the contract size from your margin account? 
D)  telling you that you can withdraw $50 times the contract size from your margin account?

Question 5

An oil producer would sell,rather than buy,crude oil futures to protect against falling oil prices.

Accepted Answer

A) True 
 B)False

Question 6

A farmer hedged his risk by buying put options on wheat with an exercise price of $6.70 at a price of $0.14 per bushel.If the price of wheat at the expiration of the contract is $6.70,what is the net revenue from each bushel of wheat?

Accepted Answer

A)  $6.56 
B)  $6.63 
C)  $6.70 
D)  $6.84

Question 7

The seller of a pork bellies futures contract at $1.41 per pound noted that the closing price of pork bellies was $1.44 today.What will happen to this contract,which requires delivery of 40,000 pounds of pork bellies at expiration?

Accepted Answer

A)  A loss of $400 is posted to the account. 
B)  A gain of $400 is posted to the account. 
C)  A loss of $1,200 is posted to the account. 
D)  A gain of $1,200 is posted to the account.

Question 8

Firms use options to speculate not to reduce risk.

Accepted Answer

A) True 
 B)False

Question 9

As time draws closer to contract expiration,futures prices can be expected to:

Accepted Answer

A)  increase as the demand for delivery intensifies. 
B)  decrease as speculators resolve the uncertainty of prices. 
C)  move similarly to broad-based market indices, such as the S&P 500. 
D)  converge upon the spot price.

Question 10

Unlike options,the purchase of a futures contract is a binding obligation to purchase at a fixed price at contract maturity.

Accepted Answer

A) True 
 B)False

Question 11

A gasoline distributor buys a gasoline futures contract to receive 42,000 gallons of gasoline at $2.94 per gallon.How is the account marked to market if gasoline futures close the next day at $2.97?

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 12

Which one of the following statements is correct?

Accepted Answer

A)  An option seller makes more profits than an option buyer. 
B)  A futures seller makes more profits than a futures buyer. 
C)  The profit realized by the buyer of futures will be equal to the loss incurred by the seller. 
D)  Both the buyer and the seller of a futures contract can earn a profit.

Question 13

Which one of the following futures contracts is written on an asset that cannot be delivered?

Accepted Answer

A)  U.S. Treasury bills 
B)  Wheat 
C)  Standard and Poor's index 
D)  British pounds

Question 14

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

Accepted Answer

A)  doubling the total payments by the contract buyer. 
B)  doubling the total payments by 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 15

What form of insurance 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 16

Properly managed,hedging can be a very profitable activity.

Accepted Answer

A) True 
 B)False

Question 17

Four investors buy sugar futures.Three are speculators and one is hedging.Which of the following is hedging?

Accepted Answer

A)  wheat farmer 
B)  mutual fund 
C)  soft drink producer 
D)  none of the options

Question 18

A bond investor who is worried about future fluctuations in interest rates could:

Accepted Answer

A)  enter into a swap to pay both a fixed and a floating rate. 
B)  enter into a swap to pay a fixed rate and receive a floating rate. 
C)  enter into a swap to pay a floating rate and pay a fixed rate. 
D)  enter into a swap to receive both a fixed and a floating rate.

Question 19

Why are most futures contracts not settled through delivery of the product?

Accepted Answer

A)  Most contracts are settled through the margin account. 
B)  Most contracts expire with neither party having an obligation to the other party. 
C)  Most participants cancel their futures contracts through purchase of an option contract. 
D)  It is easier and cheaper to settle in cash or by an offsetting futures transaction.

Question 20

A producer that uses options to reduce downside risk is buying a "protective put."

Accepted Answer

A) True 
 B)False

Exam 24: Risk Management

A commodity producer can place a floor on its revenues by selling put options on the commodity.

A milling company buys a futures contract that requires it to take delivery of 5,000 bushels of wheat at a price of $6.75 per bushel.Next day the price of the future is $6.80.The miller:

Insurance is often an effective way to reduce risk when the insurance company can spread its risk over many different policies.

Yesterday you sold six-month futures on the S&P index at a price of 2,100.Today the index closed at 2,050 and the future at 2,140.You get a call from your broker.Is he:

An oil producer would sell,rather than buy,crude oil futures to protect against falling oil prices.

A farmer hedged his risk by buying put options on wheat with an exercise price of $6.70 at a price of $0.14 per bushel.If the price of wheat at the expiration of the contract is $6.70,what is the net revenue from each bushel of wheat?

The seller of a pork bellies futures contract at $1.41 per pound noted that the closing price of pork bellies was $1.44 today.What will happen to this contract,which requires delivery of 40,000 pounds of pork bellies at expiration?

Firms use options to speculate not to reduce risk.

As time draws closer to contract expiration,futures prices can be expected to:

Unlike options,the purchase of a futures contract is a binding obligation to purchase at a fixed price at contract maturity.

A gasoline distributor buys a gasoline futures contract to receive 42,000 gallons of gasoline at $2.94 per gallon.How is the account marked to market if gasoline futures close the next day at $2.97?

Which one of the following statements is correct?

Which one of the following futures contracts is written on an asset that cannot be delivered?

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

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

Properly managed,hedging can be a very profitable activity.

Four investors buy sugar futures.Three are speculators and one is hedging.Which of the following is hedging?

A bond investor who is worried about future fluctuations in interest rates could:

Why are most futures contracts not settled through delivery of the product?

A producer that uses options to reduce downside risk is buying a "protective put."