Question 1

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 2

Suppose that the current level of the S&P 500 Index is 1100.The prospective dividend yield is 3%,and the current risk-free interest rate is 7%.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) 1056 
B) 1144 
C) 1210 
D) 995 
A) 1056 
B) 1144 
C) 1210 
D) 995

Question 3

Briefly explain the term marked to market.

Accepted Answer

Futures contracts are marked to market.T

Question 4

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 5

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

Question 6

"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

Question 7

Disadvantages faced by insurance companies in bearing risk include administrative costs,adverse selection,and moral hazard.

Accepted Answer

A) True 
 B)False

Question 8

Are companies that purchase or sell derivative contracts necessarily speculating?

Accepted Answer

Whether a firm is hedging or speculating

Question 9

Which of the following statements about forwards,futures,and options is correct?

Accepted Answer

A) Forward contracts and futures contracts are economically similar,but vary greatly in how they are traded. 
B) Futures contracts and options contracts are economically similar,but vary greatly in how they are traded. 
C) Forward contracts and options contracts are economically similar,but vary greatly in how they are traded. 
D) Forward contracts,futures contracts,and options contracts are all economically similar,but vary greatly in how they are traded. 
A) Forward contracts and futures contracts are economically similar,but vary greatly in how they are traded. 
B) Futures contracts and options contracts are economically similar,but vary greatly in how they are traded. 
C) Forward contracts and options contracts are economically similar,but vary greatly in how they are traded. 
D) Forward contracts,futures contracts,and options contracts are all economically similar,but vary greatly in how they are traded.

Question 10

Insurance companies face the following problem(s):

Accepted Answer

A) administrative costs. 
B) adverse selection. 
C) moral hazard. 
D) all of these answers. 
A) administrative costs. 
B) adverse selection. 
C) moral hazard. 
D) all of these answers.

Question 11

A company that wishes to lock in an interest rate on future borrowing can either enter into an FRA or it can borrow long-term funds and lend short-term.

Accepted Answer

A) True 
 B)False

Question 12

Suppose that the current level of the Standard & Poor's Index is 500.The prospective dividend yield on S&P500 stocks is 2%,and the risk-free interest rate is 6%.What is the value of a one-year futures contract on the index? (Assume all dividend payments occur at the end of the year.)

Accepted Answer

A) 530 
B) 520 
C) 540 
D) 560 
A) 530 
B) 520 
C) 540 
D) 560

Question 13

Briefly explain the mechanics of homemade forward rate agreements.

Accepted Answer

By borrowing short-term and le

Question 14

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 9%.

Accepted Answer

A) True 
 B)False

Question 15

Generally,hedging transactions are:

Accepted Answer

A) negative NPV transactions. 
B) positive NPV transactions. 
C) zero-NPV transactions. 
D) none of these answers. 
A) negative NPV transactions. 
B) positive NPV transactions. 
C) zero-NPV transactions. 
D) none of these answers.

Question 16

Which of the following derivative contract features does not reduce counterparty risk?

Accepted Answer

A) flexible forward contracts 
B) standardized exchange-listed contracts 
C) requirements to post margin 
D) requirement to trade via a clearingho 
A) flexible forward contracts 
B) standardized exchange-listed contracts 
C) requirements to post margin 
D) requirement to trade via a clearingho

Question 17

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

Question 18

If the one-year spot interest rate is 8% and the two-year spot interest rate is 9%,calculate the one-year forward interest rate one year from today.

Accepted Answer

A) 10.0% 
B) 10.5% 
C) 11.0% 
D) 11.5% 
A) 10.0% 
B) 10.5% 
C) 11.0% 
D) 11.5%

Question 19

A risk manager should address which of the following considerations?
I.The firm needs to understand the major risks and consequences that the company faces.
II.The firm needs to determine if it is being paid for any particular risk.
III.The firm should simply view risks as external factors beyond the firm's control.
IV.The firm should know how to control a particular risk.

Accepted Answer

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

Question 20

The relationship between the spot and futures prices of financial futures is given by:

Accepted Answer

A) [Futures price] = Spot price x (1 + rf)^t (where rf = risk-free rate). 
B) [Futures price] = Spot price x (1 + rf - y)^t (where y = dividend yield or interest rate). 
C) [Futures price] = Spot price x (1 + rm)^t (where rm = market rate of return). 
D) [Futures price] = Spot price x (1 + rm - rf)^t. 
A) [Futures price] = Spot price x (1 + rf)^t (where rf = risk-free rate). 
B) [Futures price] = Spot price x (1 + rf - y)^t (where y = dividend yield or interest rate). 
C) [Futures price] = Spot price x (1 + rm)^t (where rm = market rate of return). 
D) [Futures price] = Spot price x (1 + rm - rf)^t.

Exam 26: Managing Risk

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.

Suppose that the current level of the S&P 500 Index is 1100.The prospective dividend yield is 3%,and the current risk-free interest rate is 7%.What is the value of a one-year futures contract on the index? (Assume all dividends are paid at the end of the year.)

Briefly explain the term marked to market.

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

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

Disadvantages faced by insurance companies in bearing risk include administrative costs,adverse selection,and moral hazard.

Are companies that purchase or sell derivative contracts necessarily speculating?

Which of the following statements about forwards,futures,and options is correct?

Insurance companies face the following problem(s):

A company that wishes to lock in an interest rate on future borrowing can either enter into an FRA or it can borrow long-term funds and lend short-term.

Suppose that the current level of the Standard & Poor's Index is 500.The prospective dividend yield on S&P500 stocks is 2%,and the risk-free interest rate is 6%.What is the value of a one-year futures contract on the index? (Assume all dividend payments occur at the end of the year.)

Briefly explain the mechanics of homemade forward rate agreements.

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 9%.

Generally,hedging transactions are:

Which of the following derivative contract features does not reduce counterparty risk?

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

If the one-year spot interest rate is 8% and the two-year spot interest rate is 9%,calculate the one-year forward interest rate one year from today.

The relationship between the spot and futures prices of financial futures is given by:

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

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