Question 1

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 2

In bearing risk,what disadvantages do insurance companies face?

Accepted Answer

There are three major disadvan

Question 3

Hedging contracts on a futures exchange eliminates:

Accepted Answer

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

Question 4

What investment would be a hedge for a corn farmer?

Accepted Answer

A) Long corn put option 
B) Long corn call option 
C) Long corn futures 
D) None of these answers 
A) Long corn put option 
B) Long corn call option 
C) Long corn futures 
D) None of these answers

Question 5

Insurance companies,by issuing Cat bonds (catastrophe bonds),share their risks with:
I.the government;
II.other insurance companies;
III.bond investors

Accepted Answer

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

Question 6

For commodity futures: (Futures price)x (1 + rf)^t = spot price - net convenience yield.

Accepted Answer

A) True 
 B)False

Question 7

Briefly describe a swap contract.

Accepted Answer

A swap generally involves an exchange of

Question 8

The hedge ratio or delta measures the sensitivity of the value of one asset relative to the value of another asset.

Accepted Answer

A) True 
 B)False

Question 9

Suppose that you bought eight Euro currency futures contracts .

Accepted Answer

A) $22,680,$22,180,$20,380,$19,280,$29,280 
B) $22,680,$22,380,$20,180,$19,280,$29,280 
C) $22,680,$22,180,$19,280,$22,380,$29,280 
D) none of these answers 
A) $22,680,$22,180,$20,380,$19,280,$29,280 
B) $22,680,$22,380,$20,180,$19,280,$29,280 
C) $22,680,$22,180,$19,280,$22,380,$29,280 
D) none of these answers

Question 10

If the one-year spot interest rate is 6% and the two-year spot interest rate is 7%,calculate the one-year forward interest rate one year from today.

Accepted Answer

A) 6.5% 
B) 7.0% 
C) 7.5% 
D) 8.0% 
A) 6.5% 
B) 7.0% 
C) 7.5% 
D) 8.0%

Question 11

What is the difference between hedging,speculation,and arbitrage?

Accepted Answer

Hedging consists of using financial inst

Question 12

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 13

Four investors enter into long sugar contracts.Three are speculators and one is hedging.Which of the following is hedging?

Accepted Answer

A) Farmer 
B) Cereal company 
C) Mutual fund 
D) None of these answers 
A) Farmer 
B) Cereal company 
C) Mutual fund 
D) None of these answers

Question 14

When a firm hedges a risk it:

Accepted Answer

A) eliminates the risk. 
B) transfers the risk to someone else. 
C) makes the government assume the risk. 
D) increases the risk. 
A) eliminates the risk. 
B) transfers the risk to someone else. 
C) makes the government assume the risk. 
D) increases the risk.

Question 15

A financial institution can hedge its interest rate risk by:

Accepted Answer

A) matching the duration of its assets weighted by the book value of its assets to the duration of its liabilities weighted by the book value of its liabilities. 
B) setting the duration of its assets equal to half that of the duration of its liabilities. 
C) matching the duration of its assets weighted by the market value of its assets with the duration of its liabilities weighted by the market value of its liabilities. 
D) setting the duration of its assets weighted by the market value of its assets to one-half that of the duration of the liabilities weighted by the market value of the liabilities. 
A) matching the duration of its assets weighted by the book value of its assets to the duration of its liabilities weighted by the book value of its liabilities. 
B) setting the duration of its assets equal to half that of the duration of its liabilities. 
C) matching the duration of its assets weighted by the market value of its assets with the duration of its liabilities weighted by the market value of its liabilities. 
D) setting the duration of its assets weighted by the market value of its assets to one-half that of the duration of the liabilities weighted by the market value of the liabilities.

Question 16

Most of the world's largest companies use derivatives to manage risk.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

The spot price of wheat is $2.90/bushel.The one-year futures price is $3.00/bushel.If the risk-free rate is 5%,calculate the net convenience yield.

Accepted Answer

A) -0.016 
B) +0.016 
C) +0.0345 
D) +0.045 
A) -0.016 
B) +0.016 
C) +0.0345 
D) +0.045

Question 19

Derivative instruments are financial contracts whose value depends on the value of another asset.

Accepted Answer

A) True 
 B)False

Question 20

Third National Bank has made a 10-year,$25 million fixed-rate loan at 12%.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% 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

Exam 26: Managing Risk

A derivative is a financial instrument whose value is determined by:

In bearing risk,what disadvantages do insurance companies face?

Hedging contracts on a futures exchange eliminates:

What investment would be a hedge for a corn farmer?

Insurance companies,by issuing Cat bonds (catastrophe bonds),share their risks with: I.the government; II.other insurance companies; III.bond investors

For commodity futures: (Futures price)x (1 + rf)^t = spot price - net convenience yield.

Briefly describe a swap contract.

The hedge ratio or delta measures the sensitivity of the value of one asset relative to the value of another asset.

Suppose that you bought eight Euro currency futures contracts .

If the one-year spot interest rate is 6% and the two-year spot interest rate is 7%,calculate the one-year forward interest rate one year from today.

What is the difference between hedging,speculation,and arbitrage?

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

Four investors enter into long sugar contracts.Three are speculators and one is hedging.Which of the following is hedging?

When a firm hedges a risk it:

A financial institution can hedge its interest rate risk by:

Most of the world's largest companies use derivatives to manage risk.

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

The spot price of wheat is $2.90/bushel.The one-year futures price is $3.00/bushel.If the risk-free rate is 5%,calculate the net convenience yield.

Derivative instruments are financial contracts whose value depends on the value of another asset.

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 commodity futures: (Futures price)x (1 + r_f)^t = spot price - net convenience yield.