Question 1

The seller of a forward contract agrees to:

Accepted Answer

A) deliver a product at a later date for a price set today. 
B) receive a product at a later date at the price on that later date. 
C) receive a product at a later date for a price set today. 
D) deliver a product at a later date for a price set on that later date. 
A) deliver a product at a later date for a price set today. 
B) receive a product at a later date at the price on that later date. 
C) receive a product at a later date for a price set today. 
D) deliver a product at a later date for a price set on that later date. A

Question 2

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 A

Question 3

What are the four basic types of contracts or instruments used in financial risk management?

Accepted Answer

The four basic types of contracts or financial instruments used in financial risk management are forwards,futures,options,and swaps.

Question 4

For financial futures: (Spot price)/(1 + rf - y)^t = futures price.

Accepted Answer

A) True 
 B)False

Question 5

Suppose you borrow $95.24 for one year at 5% and invest $95.24 for two years at 7%.For the time period beginning one year from today,you have:

Accepted Answer

A) borrowed at 7%. 
B) invested at 7%. 
C) borrowed at 9%. 
D) invested at 9%. 
A) borrowed at 7%. 
B) invested at 7%. 
C) borrowed at 9%. 
D) invested at 9%.

Question 6

The following are sensible reasons for a firm to engage in hedge transactions:
I.to reduce the risk of financial distress;
II.to reduce the fluctuations in its income;
III.to mitigate agency costs

Accepted Answer

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

Question 7

Why are derivatives necessary for a thriving economy?

Accepted Answer

Besides asset pricing,risk management is

Question 8

A derivative contract is transacted between a hedger and a speculator.What is the impact of the transaction on the risk profile of these two parties?

Accepted Answer

A) It increases the risk to both parties. 
B) It decreases risk in both cases. 
C) It increases risk of the hedger and decreases risk of the speculator. 
D) It reduces the risk of the hedger and increases the risk of the speculator. 
A) It increases the risk to both parties. 
B) It decreases risk in both cases. 
C) It increases risk of the hedger and decreases risk of the speculator. 
D) It reduces the risk of the hedger and increases the risk of the speculator.

Question 9

A forward interest rate contract is called a(an):

Accepted Answer

A) interest rate options agreement. 
B) forward rate agreement. 
C) futures rate agreement. 
D) none of these answers. 
A) interest rate options agreement. 
B) forward rate agreement. 
C) futures rate agreement. 
D) none of these answers.

Question 10

In a "total return swap" the underlying asset might be a:
I.common stock
II.loan
III.commodity
IV.market index

Accepted Answer

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

Question 11

If you sold a wheat futures contract for $3.75 per bushel and the contract ended at $3.60,what is your profit per bushel? (Ignore transaction costs.)

Accepted Answer

A) -$3.60 
B) $0.15 
C) $3.60 
D) -$0.15 
A) -$3.60 
B) $0.15 
C) $3.60 
D) -$0.15

Question 12

Your firm operates an oil refinery and is therefore naturally short on crude oil.You buy offsetting oil market futures to hedge your natural position.Shortly thereafter,local pipelines were damaged in a recent earthquake,leaving you with the highest local crude oil prices in decades.Simultaneously,unexpectedly high recent production from Mexico,Brazil,and the Baltic Sea has driven down the global price of crude and your financial hedge has lost you millions.You have fallen victim to what kind of risk?

Accepted Answer

A) counterparty risk 
B) basis risk 
C) market risk 
D) political risk 
A) counterparty risk 
B) basis risk 
C) market risk 
D) political risk

Question 13

If a bank is asked to quote a rate on a one-year loan one year from today and the current interest rate on a one-year loan is 7% and a two-year loan is 8%,it should quote 7.5%,which is the average of the two rates.

Accepted Answer

A) True 
 B)False

Question 14

The price for immediate delivery of a commodity is called the:

Accepted Answer

A) forward price. 
B) exercise price. 
C) spot price. 
D) impact price. 
A) forward price. 
B) exercise price. 
C) spot price. 
D) impact price.

Question 15

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 16

The term "derivatives" refers to:
i.forwards; II)futures; III)swaps; IV)options

Accepted Answer

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

Question 17

Briefly explain how a firm can hedge its risks using options.

Accepted Answer

A firm can use put options,for example,t

Question 18

One can describe a forward contract as agreeing today to buy a product:

Accepted Answer

A) at a later date at a price to be set in the future; 
B) today at its current price; 
C) at a later date at a price set today; 
D) if and only if its price rises above its exercise price 
A) at a later date at a price to be set in the future; 
B) today at its current price; 
C) at a later date at a price set today; 
D) if and only if its price rises above its exercise price

Question 19

First National Bank recently made a 5-year,$100 million fixed-rate loan at 10%.Annual interest payments are $10 million,and all principal will be repaid in year 5.The bank wants to swap the fixed interest payment into floating-rate payments.If the bank could borrow at a fixed rate of 8% for 5 years,what is the notional principal of the swap?

Accepted Answer

A) $80 million 
B) $100 million 
C) $125 million 
D) $180 million 
A) $80 million 
B) $100 million 
C) $125 million 
D) $180 million

Question 20

When a standardized forward contract is traded on an exchange,it becomes a(n):

Accepted Answer

A) forward contract. 
B) futures contract. 
C) options contract. 
D) swap contract. 
A) forward contract. 
B) futures contract. 
C) options contract. 
D) swap contract.

Exam 26: Managing Risk

The seller of a forward contract agrees to:

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 $.)

What are the four basic types of contracts or instruments used in financial risk management?

For financial futures: (Spot price)/(1 + rf - y)^t = futures price.

Suppose you borrow $95.24 for one year at 5% and invest $95.24 for two years at 7%.For the time period beginning one year from today,you have:

The following are sensible reasons for a firm to engage in hedge transactions: I.to reduce the risk of financial distress; II.to reduce the fluctuations in its income; III.to mitigate agency costs

Why are derivatives necessary for a thriving economy?

A derivative contract is transacted between a hedger and a speculator.What is the impact of the transaction on the risk profile of these two parties?

A forward interest rate contract is called a(an):

In a "total return swap" the underlying asset might be a: I.common stock II.loan III.commodity IV.market index

If you sold a wheat futures contract for $3.75 per bushel and the contract ended at $3.60,what is your profit per bushel? (Ignore transaction costs.)

If a bank is asked to quote a rate on a one-year loan one year from today and the current interest rate on a one-year loan is 7% and a two-year loan is 8%,it should quote 7.5%,which is the average of the two rates.

The price for immediate delivery of a commodity is called the:

A type of risk peculiar to a forward contract is called:

The term "derivatives" refers to: i.forwards; II)futures; III)swaps; IV)options

Briefly explain how a firm can hedge its risks using options.

One can describe a forward contract as agreeing today to buy a product:

When a standardized forward contract is traded on an exchange,it becomes a(n):

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

Investment, Strategy, and Economic Rents

Agency Problems, Compensation, and Performance Measurement

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

Filters

For financial futures: (Spot price)/(1 + r_f - y)^t = futures price.