Question 1

Which one of the following obligates you only on the expiration date to sell an asset at the strike price if the option is exercised?

Accepted Answer

A) American call 
B) American put 
C) European call 
D) European put 
E) European swap 
A) American call 
B) American put 
C) European call 
D) European put 
E) European swap C

Question 2

A hedge between which two of the following firms is most apt to reduce each firm's financial risk exposure?

Accepted Answer

A) wheat farmer and bakery 
B) oil producer and coal miner 
C) wheat grower and pharmaceutical firm 
D) pastry bakery and cotton farmer 
E) shoe manufacturer and coat manufacturer 
A) wheat farmer and bakery 
B) oil producer and coal miner 
C) wheat grower and pharmaceutical firm 
D) pastry bakery and cotton farmer 
E) shoe manufacturer and coat manufacturer A

Question 3

You own three January futures contracts on gold. What is the total value of your position as of the end of this day's trading?
Gold - 100 troy oz.:
u.S. dollars and cents per troy oz.

Accepted Answer

A) $66,050 
B) $66,740 
C) $66,820 
D) $198,150 
E) $200,460 
A) $66,050 
B) $66,740 
C) $66,820 
D) $198,150 
E) $200,460 D

Question 4

Which one of the following is true regarding forward contracts?

Accepted Answer

A) The upfront costs to enter a forward contract can be significant. 
B) If a buyer of a forward contract earns a $200 profit then the seller will also profit by $200. 
C) The buyer wins when market prices are less than the forward price. 
D) The payoff profile for the buyer of a forward contract is an upward sloping linear function. 
E) If the seller of a forward contract earns a profit then the buyer has neither a profit nor a loss. 
A) The upfront costs to enter a forward contract can be significant. 
B) If a buyer of a forward contract earns a $200 profit then the seller will also profit by $200. 
C) The buyer wins when market prices are less than the forward price. 
D) The payoff profile for the buyer of a forward contract is an upward sloping linear function. 
E) If the seller of a forward contract earns a profit then the buyer has neither a profit nor a loss.

Question 5

You are a jewelry maker. In May of each year, you purchase 10,000 troy ounces of silver to restock your production inventory. Today, you hedged your position at what turned out to be the lowest price of the day. Assume the actual price per troy ounce of silver is 9.215 in May. How much did you gain or lose by hedging your position?
Silver - 5,000 troy oz.:
u.S. dollars and cents per troy oz.

Accepted Answer

A) loss $4,400 
B) loss $2,200 
C) no gain or loss 
D) gain $2,200 
E) gain $4,400 
A) loss $4,400 
B) loss $2,200 
C) no gain or loss 
D) gain $2,200 
E) gain $4,400

Question 6

Farmer Ted planted 200 acres in wheat this year. The weather has been perfect and he expects to harvest a record crop within the next two weeks. At present, he has no storage facilities and therefore must sell his crop as soon as it is harvested. Which one of the following risks is he facing because he must sell his crop at whatever the market price is at harvest time?

Accepted Answer

A) futures risk 
B) volatility exposure 
C) surplus risk 
D) transactions exposure 
E) translation exposure 
A) futures risk 
B) volatility exposure 
C) surplus risk 
D) transactions exposure 
E) translation exposure

Question 7

Interest rate swaps:
I. benefit either the buyer or the seller, but not both.
II. are often used in conjunction with a currency swap.
III. are commonly used in business.
IV. can be used to change the index which determines the variable rate on a firm's debt.

Accepted Answer

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

Question 8

Suppose you purchase the November call option on orange juice futures with a strike price of 150 at the price shown in the table below. What will be your profit or loss on this contract if the price of orange juice futures is $0.616 per pound at expiration of the option contract?
Futures Options
Orange juice:
15,000 lbs, U.S. cents per lb.

Accepted Answer

A) loss of $2,107.50 
B) loss of $1,717.50 
C) no profit or loss 
D) profit of $1,717.50 
E) profit of $2,107.50 
A) loss of $2,107.50 
B) loss of $1,717.50 
C) no profit or loss 
D) profit of $1,717.50 
E) profit of $2,107.50

Question 9

What was the highest price per troy ounce for the December silver futures contract today?
Silver - 5,000 troy oz.:
Dollars and cents per troy oz.

Accepted Answer

A) $10.185 
B) $10.225 
C) $10.250 
D) $10.814 
E) $10.830 
A) $10.185 
B) $10.225 
C) $10.250 
D) $10.814 
E) $10.830

Question 10

Suppose your firm produces breakfast cereal and needs 65,000 bushels of corn in December for an upcoming promotion. You would like to lock in your costs today because you are concerned that corn prices might go up between now and December. To hedge your risk exposure, you could purchase corn futures contracts today effectively locking in a total settlement price of _____, based on the closing price shown in the table below. Futures:
Corn - 5,000 bu., U.S. cents per bu.

Accepted Answer

A) $163,800 
B) $164,125 
C) $174,238 
D) $179,400 
E) $183,463 
A) $163,800 
B) $164,125 
C) $174,238 
D) $179,400 
E) $183,463

Question 11

Long-run financial risk:

Accepted Answer

A) can frequently be hedged on a permanent basis. 
B) is best hedged on a division by division basis within a conglomerate. 
C) is related more to near-term transactions than to advancements in technology. 
D) generally results from changes in the underlying economics of a business. 
E) can generally be hedged such that the financial viability of a firm is protected. 
A) can frequently be hedged on a permanent basis. 
B) is best hedged on a division by division basis within a conglomerate. 
C) is related more to near-term transactions than to advancements in technology. 
D) generally results from changes in the underlying economics of a business. 
E) can generally be hedged such that the financial viability of a firm is protected.

Question 12

Suppose a financial manager buys call options on 45,000 barrels of oil with an exercise price of $30 per barrel. She simultaneously sells a put option on 45,000 barrels of oil with the same exercise price of $30 per barrel. Her net profit per barrel is _____ if the price per barrel is $29 and _____ if the price per barrel is $35.

Accepted Answer

A) -$5; $1 
B) -$1; $0 
C) $0; -$1 
D) $0; $1 
E) -$1; $5 
A) -$5; $1 
B) -$1; $0 
C) $0; -$1 
D) $0; $1 
E) -$1; $5

Question 13

Which of the following are futures exchanges?
I. New York Mercantile Exchange
II. New York Stock Exchange
III. Chicago Board of Trade
IV. NASDAQ

Accepted Answer

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

Question 14

You are the buyer for a cereal company and you must buy 80,000 bushels of corn next month. The futures contracts on corn are based on 5,000 bushels and are currently quoted at 415'0 cents per bushel for delivery next month. If you want to hedge your cost, you should _____ contracts at a cost of _____ per contract.

Accepted Answer

A) buy 12; $2,075 
B) buy 16; $20,750 
C) buy 16; $2,075,000 
D) sell 12; $2,075 
E) sell 16; $2,075,000 
A) buy 12; $2,075 
B) buy 16; $20,750 
C) buy 16; $2,075,000 
D) sell 12; $2,075 
E) sell 16; $2,075,000

Question 15

Southern Groves raises tangerines. To hedge its risk, the firm trades in the orange futures market. This process is known as:

Accepted Answer

A) secondary trading. 
B) open trading. 
C) open-hedging. 
D) cross-hedging. 
E) perfect-hedging. 
A) secondary trading. 
B) open trading. 
C) open-hedging. 
D) cross-hedging. 
E) perfect-hedging.

Question 16

This morning a cereal maker agreed to pay a farmer $4.40 a bushel for 5,000 bushels of wheat that the farmer will ship to the factory four months from now. What is this legally binding agreement called?

Accepted Answer

A) forward contract 
B) spot contract 
C) swap 
D) exchange 
E) floating contract 
A) forward contract 
B) spot contract 
C) swap 
D) exchange 
E) floating contract

Question 17

Farmer Mac owns a large orange grove in Florida. The value of his business is directly related to the price of oranges. Which one of the following is a graphical representation of this price-value relationship?

Accepted Answer

A) exchange line 
B) net present value profile 
C) risk profile 
D) market line 
E) return grid 
A) exchange line 
B) net present value profile 
C) risk profile 
D) market line 
E) return grid

Question 18

Suppose you sell nine September silver futures contracts at the last price of the day as shown in the table below. What will be your profit or loss on this contract if the price turns out to be $12.09 per ounce at expiration?
Futures:
Silver - 5,000 troy oz, U.S. cents per troy oz.

Accepted Answer

A) loss of $27,225 
B) loss of $7,050 
C) loss of $3,025 
D) profit of $3,025 
E) profit of $27,225 
A) loss of $27,225 
B) loss of $7,050 
C) loss of $3,025 
D) profit of $3,025 
E) profit of $27,225

Question 19

You expect to deliver 40,000 bushels of wheat to the market in July. Today, you hedge your position by selling futures contracts on half of your expected delivery at the final price of the day. Assume that the market price turns out to be 582.0 when you actually deliver the wheat. How much more or less would you have earned if you had not bought the futures contracts?
Wheat - 5,000 bu.:
u.S. cents per bu.

Accepted Answer

A) $8,000 less 
B) $4,000 less 
C) neither more nor less 
D) $4,000 more 
E) $8,000 more 
A) $8,000 less 
B) $4,000 less 
C) neither more nor less 
D) $4,000 more 
E) $8,000 more

Question 20

What are the primary motives for a hedger and a speculator in the derivatives market?
 If a wheat farmer sells wheat futures, is that hedging or speculating?
 Explain.

Accepted Answer

The key is whether or not the contractin

Which one of the following obligates you only on the expiration date to sell an asset at the strike price if the option is exercised?

A hedge between which two of the following firms is most apt to reduce each firm's financial risk exposure?

You own three January futures contracts on gold. What is the total value of your position as of the end of this day's trading? Gold - 100 troy oz.: u.S. dollars and cents per troy oz.

Which one of the following is true regarding forward contracts?

Interest rate swaps: I. benefit either the buyer or the seller, but not both. II. are often used in conjunction with a currency swap. III. are commonly used in business. IV. can be used to change the index which determines the variable rate on a firm's debt.

What was the highest price per troy ounce for the December silver futures contract today? Silver - 5,000 troy oz.: Dollars and cents per troy oz.

Long-run financial risk:

Which of the following are futures exchanges? I. New York Mercantile Exchange II. New York Stock Exchange III. Chicago Board of Trade IV. NASDAQ

Southern Groves raises tangerines. To hedge its risk, the firm trades in the orange futures market. This process is known as:

This morning a cereal maker agreed to pay a farmer $4.40 a bushel for 5,000 bushels of wheat that the farmer will ship to the factory four months from now. What is this legally binding agreement called?

Farmer Mac owns a large orange grove in Florida. The value of his business is directly related to the price of oranges. Which one of the following is a graphical representation of this price-value relationship?

Suppose you sell nine September silver futures contracts at the last price of the day as shown in the table below. What will be your profit or loss on this contract if the price turns out to be $12.09 per ounce at expiration? Futures: Silver - 5,000 troy oz, U.S. cents per troy oz.

What are the primary motives for a hedger and a speculator in the derivatives market? If a wheat farmer sells wheat futures, is that hedging or speculating? Explain.

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working With Financial Statements

Long-Term Financial Planning and 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

Some 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

Behavioral Finance: Implications for Financial Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Leasing

Filters

Exam 23: Risk Management: An Introduction to Financial Engineering

Which one of the following obligates you only on the expiration date to sell an asset at the strike price if the option is exercised?

A hedge between which two of the following firms is most apt to reduce each firm's financial risk exposure?

You own three January futures contracts on gold. What is the total value of your position as of the end of this day's trading? Gold - 100 troy oz.: u.S. dollars and cents per troy oz.

Which one of the following is true regarding forward contracts?

Interest rate swaps: I. benefit either the buyer or the seller, but not both. II. are often used in conjunction with a currency swap. III. are commonly used in business. IV. can be used to change the index which determines the variable rate on a firm's debt.

What was the highest price per troy ounce for the December silver futures contract today? Silver - 5,000 troy oz.: Dollars and cents per troy oz.

Long-run financial risk:

Which of the following are futures exchanges? I. New York Mercantile Exchange II. New York Stock Exchange III. Chicago Board of Trade IV. NASDAQ

Southern Groves raises tangerines. To hedge its risk, the firm trades in the orange futures market. This process is known as:

This morning a cereal maker agreed to pay a farmer $4.40 a bushel for 5,000 bushels of wheat that the farmer will ship to the factory four months from now. What is this legally binding agreement called?

Farmer Mac owns a large orange grove in Florida. The value of his business is directly related to the price of oranges. Which one of the following is a graphical representation of this price-value relationship?

Suppose you sell nine September silver futures contracts at the last price of the day as shown in the table below. What will be your profit or loss on this contract if the price turns out to be $12.09 per ounce at expiration? Futures: Silver - 5,000 troy oz, U.S. cents per troy oz.

What are the primary motives for a hedger and a speculator in the derivatives market? If a wheat farmer sells wheat futures, is that hedging or speculating? Explain.

Introduction to Corporate Finance

Financial Statements, Taxes, and Cash Flow

Working With Financial Statements

Long-Term Financial Planning and 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

Some 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

Behavioral Finance: Implications for Financial Management

Options and Corporate Finance

Option Valuation

Mergers and Acquisitions

Leasing

Filters