Question 1

Explain the differences between an option contract and a forward contract.

Accepted Answer

An option contract grants the buyer a right, but only obligates the seller. A forward contract obligates both the buyer and the seller. An option grants a right which has value and therefore requires the option buyer to pay an option premium at the time the option is purchased. No money is exchanged when a forward contract is created.

Question 2

What is the amount of the difference in the lifetime high and low contract values for the May coffee futures?

Accepted Answer

A)  $468.75 
B)  $543.75 
C)  $712.50 
D)  $6,037.50 
E)  $8,118.75 
A)  $468.75 
B)  $543.75 
C)  $712.50 
D)  $6,037.50 
E)  $8,118.75 D

Question 3

You speculate in the market by selling 15 gold futures contracts when the futures price is $418.23 per ounce. The price on the contract maturity date is $397.62. What is your total profit (loss) if the contract size is 100 ounces?

Accepted Answer

A)  $206 
B)  $309 
C)  $2,061 
D)  $20,610 
E)  $30,915 
A)  $206 
B)  $309 
C)  $2,061 
D)  $20,610 
E)  $30,915 E

Question 4

Assume you purchased one October futures contract at the lifetime low and sold the contract at the lifetime high. How much profit would you have?

Accepted Answer

A)  $500 
B)  $620 
C)  $2,850 
D)  $9,250 
E)  $9,650 
A)  $500 
B)  $620 
C)  $2,850 
D)  $9,250 
E)  $9,650

Question 5

A buyer of which one of the following contracts incurs no costs until the expiration date? Ignore transaction expenses.

Accepted Answer

A)  Call option. 
B)  Put option. 
C)  Forward contract. 
D)  Futures contract. 
E)  Caption contract. 
A)  Call option. 
B)  Put option. 
C)  Forward contract. 
D)  Futures contract. 
E)  Caption contract.

Question 6

Your firm currently has all fixed-rate debt. You would like to convert part of this to floating-rate debt. You should consider a(n):

Accepted Answer

A)  Option on floating-rate bonds. 
B)  Forward contract on Treasury bills. 
C)  Interest rate swap. 
D)  Currency swap. 
E)  Interest rate call option. 
A)  Option on floating-rate bonds. 
B)  Forward contract on Treasury bills. 
C)  Interest rate swap. 
D)  Currency swap. 
E)  Interest rate call option.

Question 7

A call option can best be defined as:

Accepted Answer

A)  An option that gives the owner the right, but not the obligation, to buy an asset. 
B)  An option that gives the owner the right, but not the obligation, to sell an asset. 
C)  Risk that futures prices will not move directly with cash price hedged. 
D)  An agreement by two parties to exchange, or swap, specified cash flows at specified intervals in the future. 
E)  An agreement that gives the owner the right, but not the obligation, to buy or sell a specific asset at a specific price for a set period of time. 
A)  An option that gives the owner the right, but not the obligation, to buy an asset. 
B)  An option that gives the owner the right, but not the obligation, to sell an asset. 
C)  Risk that futures prices will not move directly with cash price hedged. 
D)  An agreement by two parties to exchange, or swap, specified cash flows at specified intervals in the future. 
E)  An agreement that gives the owner the right, but not the obligation, to buy or sell a specific asset at a specific price for a set period of time.

Question 8

A forward contract on wheat:

Accepted Answer

A)  Obligates the buyer to purchase a stated quantity of wheat at a specified price on a specified date. 
B)  Obligates the seller to pay the buyer the difference between the market price and the forward price on the settlement date. 
C)  Requires the buyer to mark-to-market on a daily basis. 
D)  Requires both the buyer and the seller to resettle on a daily basis. 
E)  Obligates the seller to deliver to the buyer the stated quantity of wheat on the day of the buyer's choosing up to and including the expiration day. 
A)  Obligates the buyer to purchase a stated quantity of wheat at a specified price on a specified date. 
B)  Obligates the seller to pay the buyer the difference between the market price and the forward price on the settlement date. 
C)  Requires the buyer to mark-to-market on a daily basis. 
D)  Requires both the buyer and the seller to resettle on a daily basis. 
E)  Obligates the seller to deliver to the buyer the stated quantity of wheat on the day of the buyer's choosing up to and including the expiration day.

Question 9

The difference between a futures contract and a forward contract is the:

Accepted Answer

A)  Payoff profile of the buyer. 
B)  Payoff profile of the seller. 
C)  Settlement process. 
D)  Use of the spot rate versus the contract rate at settlement. 
E)  Ability to write a futures contract, but not a forward contract, on an exchange rate. 
A)  Payoff profile of the buyer. 
B)  Payoff profile of the seller. 
C)  Settlement process. 
D)  Use of the spot rate versus the contract rate at settlement. 
E)  Ability to write a futures contract, but not a forward contract, on an exchange rate.

Question 10

Leando Enterprises has a variable rate loan and wants to lock in the rate so that the firm is in essence paying no more than 8.5% nor less than 7.5%. To do this, the firm needs to ____ a call and ____ a put option on interest rates.

Accepted Answer

A)  buy; buy 
B)  buy; sell 
C)  buy; ignore 
D)  sell; buy 
E)  sell; ignore 
A)  buy; buy 
B)  buy; sell 
C)  buy; ignore 
D)  sell; buy 
E)  sell; ignore

Question 11

If a firm creates an interest rate collar on a variable rate loan, then the rate the firm pays will always:

Accepted Answer

A)  Remain constant at the average of the floor and cap rates. 
B)  Remain constant at the floor rate. 
C)  Remain constant at the cap rate. 
D)  Be higher than, or equal to, the cap but lower than, or equal to, the floor. 
E)  Be higher than, or equal to, the floor but lower than, or equal to, the cap. 
A)  Remain constant at the average of the floor and cap rates. 
B)  Remain constant at the floor rate. 
C)  Remain constant at the cap rate. 
D)  Be higher than, or equal to, the cap but lower than, or equal to, the floor. 
E)  Be higher than, or equal to, the floor but lower than, or equal to, the cap.

Question 12

You own three September futures contracts on silver. What is the total value of your position as of the end of this day's trading?

Silver - 5,000 troy oz.; $ per troy oz.

Accepted Answer

A)  $156,420 
B)  $157,020 
C)  $157,665 
D)  $157,935 
E)  $158,355 
A)  $156,420 
B)  $157,020 
C)  $157,665 
D)  $157,935 
E)  $158,355

Question 13

Smith Brothers has a floating-rate loan based on the LIBOR rate. The Three Sisters has a floating-rate loan based on the Treasury bill. The Smith Brothers would prefer a loan based on the T-bill and the Three Sisters would prefer a loan based on LIBOR, but neither have been able to obtain the loan they prefer. These two firms would most likely benefit if they entered a(n):

Accepted Answer

A)  Forward contract on the dollar-pound exchange rate. 
B)  Commodity swap. 
C)  Exchange rate swap. 
D)  Interest rate swap. 
E)  Futures contract on the dollar-pound exchange rate. 
A)  Forward contract on the dollar-pound exchange rate. 
B)  Commodity swap. 
C)  Exchange rate swap. 
D)  Interest rate swap. 
E)  Futures contract on the dollar-pound exchange rate.

Question 14

An interest rate _____ is a call option on interest rates, a _____ is a put option on interest rates and a combination of the two is called a _____.

Accepted Answer

A)  cap; floor; collar 
B)  ceiling; cap; collar 
C)  floor; cap; caption 
D)  caption; floor; cap 
E)  cap; floor; caption 
A)  cap; floor; collar 
B)  ceiling; cap; collar 
C)  floor; cap; caption 
D)  caption; floor; cap 
E)  cap; floor; caption

Question 15

Which of the following is the best definition of payoff profile?

Accepted Answer

A)  A plot showing the gains and losses that will occur on a contract as the result of unexpected price changes. 
B)  An option that gives the owner the right, but not the obligation, to sell an asset. 
C)  A plot showing how the value of the firm is affected by changes in prices or rates. 
D)  An agreement by two parties to exchange, or swap, specified cash flows at specified intervals in the future. 
E)  Short-run financial risk arising from the need to buy or sell at uncertain prices or rates in the near future. 
A)  A plot showing the gains and losses that will occur on a contract as the result of unexpected price changes. 
B)  An option that gives the owner the right, but not the obligation, to sell an asset. 
C)  A plot showing how the value of the firm is affected by changes in prices or rates. 
D)  An agreement by two parties to exchange, or swap, specified cash flows at specified intervals in the future. 
E)  Short-run financial risk arising from the need to buy or sell at uncertain prices or rates in the near future.

Question 16

A speculator, not a hedger, would purchase a futures contract even though they had no interest or ownership in the underlying asset.

Accepted Answer

A) True 
 B)False

Question 17

You are considering two option contracts with the same strike price. Ignoring costs, which one of the following combinations will increase the value of a firm if prices move either up or down?

Accepted Answer

A)  Buying both a call and a put. 
B)  Both buying and selling a call. 
C)  Buying a call and selling a put. 
D)  Buying a put and selling a call. 
E)  Both selling a put and a call. 
A)  Buying both a call and a put. 
B)  Both buying and selling a call. 
C)  Buying a call and selling a put. 
D)  Buying a put and selling a call. 
E)  Both selling a put and a call.

Question 18

Mitch sold 10 futures contracts on copper at a price of $.8063 per pound. Contracts on copper are set at 25,000 pounds. What is the amount of Mitch's profit or loss if the price on the maturity date is $.8104?

Accepted Answer

A)  -$1,025.00 
B)  -$410.00 
C)  -$102.50 
D)  $102.50 
E)  $1,025.00 
A)  -$1,025.00 
B)  -$410.00 
C)  -$102.50 
D)  $102.50 
E)  $1,025.00

Question 19

Provide a suitable definition of call option.

Accepted Answer

An option that gives

Question 20

Provide a graphical representation of buying a put option.

Accepted Answer

The answer of Provide a graphical representation of buying a...

Exam 24: Enterprise Risk Management

Explain the differences between an option contract and a forward contract.

What is the amount of the difference in the lifetime high and low contract values for the May coffee futures?

You speculate in the market by selling 15 gold futures contracts when the futures price is $418.23 per ounce. The price on the contract maturity date is $397.62. What is your total profit (loss) if the contract size is 100 ounces?

Assume you purchased one October futures contract at the lifetime low and sold the contract at the lifetime high. How much profit would you have?

A buyer of which one of the following contracts incurs no costs until the expiration date? Ignore transaction expenses.

Your firm currently has all fixed-rate debt. You would like to convert part of this to floating-rate debt. You should consider a(n):

A call option can best be defined as:

A forward contract on wheat:

The difference between a futures contract and a forward contract is the:

Leando Enterprises has a variable rate loan and wants to lock in the rate so that the firm is in essence paying no more than 8.5% nor less than 7.5%. To do this, the firm needs to ____ a call and ____ a put option on interest rates.

If a firm creates an interest rate collar on a variable rate loan, then the rate the firm pays will always:

You own three September futures contracts on silver. What is the total value of your position as of the end of this day's trading? Silver - 5,000 troy oz.; $ per troy oz.

An interest rate _____ is a call option on interest rates, a _____ is a put option on interest rates and a combination of the two is called a _____.

Which of the following is the best definition of payoff profile?

A speculator, not a hedger, would purchase a futures contract even though they had no interest or ownership in the underlying asset.

You are considering two option contracts with the same strike price. Ignoring costs, which one of the following combinations will increase the value of a firm if prices move either up or down?

Mitch sold 10 futures contracts on copper at a price of $.8063 per pound. Contracts on copper are set at 25,000 pounds. What is the amount of Mitch's profit or loss if the price on the maturity date is $.8104?

Provide a suitable definition of call option.

Provide a graphical representation of buying a put option.

Introduction to Corporate Finance

Financial Statements, Cash Flow, and Taxes

Working With Financial Statements

Long-Term Financial Planning and Corporate Growth

Introduction to Valuation: the Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Stock Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Project Analysis and Evaluation

Lessons From Capital Market History

Return, Risk, and the Security Market Line

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Dividend Policy

Short-Term Finance and Planning

Cash and Liquidity Management

Credit and Inventory Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Options and Corporate Securities

Behavioural Finance: Implications for Financial Management

Filters

Leando Enterprises has a variable rate loan and wants to lock in the rate so that the firm is in essence paying no more than 8.5% nor less than 7.5%. To do this, the firm needs to a call and a put option on interest rates.

An interest rate ___ is a call option on interest rates, a _ is a put option on interest rates and a combination of the two is called a ___.