Question 1

The term "derivatives" refers to

Accepted Answer

A) forwards and futures. 
B) forwards, futures, and swaps. 
C) swaps and options. 
D) forwards, futures, swaps, and options. 
A) forwards and futures. 
B) forwards, futures, and swaps. 
C) swaps and options. 
D) forwards, futures, swaps, and options. D

Question 2

"Mark to market" means that, each day, any profits or losses are calculated and the trader's margin account is adjusted accordingly.

Accepted Answer

A) True 
 B)False  True

Question 3

Which of the following players would require a put option in order to hedge their natural position in the market?

Accepted Answer

A) A farmer who buys corn to feed his livestock 
B) A farmer who sells peanuts to a chocolatier 
C) A farmer who has financed his land with a floating rate mortgage 
D) A miller who buys wheat from a farmer 
A) A farmer who buys corn to feed his livestock 
B) A farmer who sells peanuts to a chocolatier 
C) A farmer who has financed his land with a floating rate mortgage 
D) A miller who buys wheat from a farmer B

Question 4

Generally, hedging transactions are

Accepted Answer

A) negative NPV transactions. 
B) positive NPV transactions. 
C) zero-NPV transactions. 
D) None of these answers are correct. 
A) negative NPV transactions. 
B) positive NPV transactions. 
C) zero-NPV transactions. 
D) None of these answers are correct.

Question 5

For commodity futures: Net convenience yield = (convenience yield − storage costs).

Accepted Answer

A) True 
 B)False

Question 6

Suppose that the current level of the S&P 500 Index is 1,100. The prospective dividend yield is 3 percent, and the current risk-free interest rate is 7 percent. What is the value of a one-year futures contract on the index? (Assume all dividends are paid at the end of the year.)

Accepted Answer

A) 1,056 
B) 1,144 
C) 1,210 
D) 995 
A) 1,056 
B) 1,144 
C) 1,210 
D) 995

Question 7

The convenience yield on a commodity futures contract is the implicit extra value created by holding the actual commodity rather than a financial claim on it.

Accepted Answer

A) True 
 B)False

Question 8

A type of risk peculiar to a forward contract is called

Accepted Answer

A) market risk. 
B) duration risk. 
C) currency risk. 
D) counterparty risk. 
A) market risk. 
B) duration risk. 
C) currency risk. 
D) counterparty risk.

Question 9

Briefly explain the term marked to market.

Accepted Answer

Futures contracts are marked to market.

Question 10

As a commodity futures contract nears expiration, the futures price converges to the spot market price for that commodity.

Accepted Answer

A) True 
 B)False

Question 11

Insurance companies have some advantages in bearing risk. These include
I.superior ability to estimate the probability of loss;
II.extensive experience and knowledge about how to reduce the risk of a loss;
III.the ability to pool risks and thereby gain from diversification;
IV.insurance companies cannot diversify away market or macroeconomic risks

Accepted Answer

A) I, II, and III only 
B) II only 
C) III only 
D) IV only 
A) I, II, and III only 
B) II only 
C) III only 
D) IV only

Question 12

Third National Bank has made a 10-year, $25 million fixed-rate loan at 12 percent. Annual interest payments are $3 million, and all principal will be repaid in year 10. The bank wants to swap the fixed interest payments into floating-rate payments. If the bank could borrow at a fixed rate of 10 percent for 10 years, what is the notional principal of the swap?

Accepted Answer

A) $40 million 
B) $20 million 
C) $25 million 
D) $30 million 
A) $40 million 
B) $20 million 
C) $25 million 
D) $30 million

Question 13

Briefly describe a swap contract.

Accepted Answer

A swap generally involves an exchange of

Question 14

Are companies that purchase or sell derivative contracts necessarily speculating?

Accepted Answer

Whether a firm is hedging or speculating

Question 15

A derivative is a financial instrument whose value is determined by

Accepted Answer

A) a regulatory body such as the FTC. 
B) the value of an underlying asset. 
C) hedging a risk. 
D) speculation. 
A) a regulatory body such as the FTC. 
B) the value of an underlying asset. 
C) hedging a risk. 
D) speculation.

Question 16

Why are derivatives necessary for a thriving economy?

Accepted Answer

Besides asset pricing, risk management i

Question 17

Suppose that you sold a futures contract for $3.75 per bushel and the contract ended at $3.60 after several days of closing prices of $3.80, $3.70, $3.65, $3.70, $3.65, and $3.60. What would the mark to market sequence be? (Cash flow per bushel, in $.)

Accepted Answer

A) −0.05, 0.10, 0.05, −0.05, 0.05, 0.05 
B) 0.05, −0.10, −0.05, 0.05, −0.05, −0.05 
C) −0.05, 0.05, 0.10, 0.05, −0.09, −0.15 
D) 0.05, −0.05, −0.10, −0.05, −0.09, −0.015 
A) −0.05, 0.10, 0.05, −0.05, 0.05, 0.05 
B) 0.05, −0.10, −0.05, 0.05, −0.05, −0.05 
C) −0.05, 0.05, 0.10, 0.05, −0.09, −0.15 
D) 0.05, −0.05, −0.10, −0.05, −0.09, −0.015

Question 18

Briefly explain the mechanics of homemade forward rate agreements.

Accepted Answer

By borrowing short-term and le

Question 19

Insurance companies, by issuing Cat bonds (catastrophe bonds), share their risks with

Accepted Answer

A) the government. 
B) other insurance companies. 
C) bond investors. 
D) the government and other insurance companies. 
A) the government. 
B) other insurance companies. 
C) bond investors. 
D) the government and other insurance companies.

Question 20

Explain how a firm wishing to invest in floating rate investments can use a swap to manage its interest rate exposure?

Accepted Answer

A firm desiring a floating rate investme

Exam 26: Managing Risk

The term "derivatives" refers to

"Mark to market" means that, each day, any profits or losses are calculated and the trader's margin account is adjusted accordingly.

Which of the following players would require a put option in order to hedge their natural position in the market?

Generally, hedging transactions are

For commodity futures: Net convenience yield = (convenience yield − storage costs).

Suppose that the current level of the S&P 500 Index is 1,100. The prospective dividend yield is 3 percent, and the current risk-free interest rate is 7 percent. What is the value of a one-year futures contract on the index? (Assume all dividends are paid at the end of the year.)

The convenience yield on a commodity futures contract is the implicit extra value created by holding the actual commodity rather than a financial claim on it.

A type of risk peculiar to a forward contract is called

Briefly explain the term marked to market.

As a commodity futures contract nears expiration, the futures price converges to the spot market price for that commodity.

Briefly describe a swap contract.

Are companies that purchase or sell derivative contracts necessarily speculating?

A derivative is a financial instrument whose value is determined by

Why are derivatives necessary for a thriving economy?

Suppose that you sold a futures contract for $3.75 per bushel and the contract ended at $3.60 after several days of closing prices of $3.80, $3.70, $3.65, $3.70, $3.65, and $3.60. What would the mark to market sequence be? (Cash flow per bushel, in $.)

Briefly explain the mechanics of homemade forward rate agreements.

Insurance companies, by issuing Cat bonds (catastrophe bonds), share their risks with

Explain how a firm wishing to invest in floating rate investments can use a swap to manage its interest rate exposure?

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

How to Ensure That Projects Truly Have Positive Npvs

Agency Problems and Investment

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

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