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Hedging can best be defined as:


A) Reducing a firm's exposure to price or rate fluctuations
B) A financial asset that represents a claim to another financial asset.
C) A plot showing how the value of the firm is affected by changes in prices or rates.
D) Short-run financial risk arising from the need to buy or sell at uncertain prices or rates in the near future.
E) Long-term financial risk arising from permanent changes in prices or other economic fundamentals.

F) C) and D)
G) A) and D)

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Provide a suitable definition of credit default swap.

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A contract that pays off when a credit e...

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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?


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.

F) B) and C)
G) A) and B)

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The seller of a forward contract has an obligation to _____ and _____.


A) Make delivery; accept payment for the goods.
B) Take delivery; accept payment for the goods.
C) Take delivery; pay for the goods.
D) Make delivery; pay for the goods.
E) Make delivery; accept the spot price on that date.

F) C) and D)
G) None of the above

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


A) The fact that the futures contract does not obligate the buyer while the forward contract does.
B) The fact that a forward contract must be paid in full at the onset while the futures contract does not.
C) The daily resettlement feature found in futures contracts but not in forward contracts.
D) The fact that a futures contract is a form of an option contract and a forward contract is not.
E) The fact that the forward contract is marked-to-the-market and the futures contract is not.

F) A) and B)
G) A) and C)

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A swap contract consists of a series of forward contracts.

A) True
B) False

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An option contract can be used to either hedge risk or speculate in the market.

A) True
B) False

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The process of using available financial instruments to create new ones is called:


A) Security derivation.
B) Risk profiling.
C) Financial engineering.
D) Forward contracting.
E) Futures trading.

F) All of the above
G) A) and B)

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A forward contract on wheat:


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.

F) B) and C)
G) A) and C)

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A swap contract can best be defined as:


A) A forward contract with the feature that gains and losses are realized each day rather than only on the settlement date.
B) Hedging an asset with contracts written on a closely related, but not identical, 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.

F) A) and E)
G) B) and C)

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You are the purchasing agent for a cookie company. You anticipate that your firm will need 15,000 bushels of oats in March. You decide to hedge your position today and did so at the closing price of The day. Assume that the actual market price turns out to be 261´0 on the day you actually buy the Oats. How much more would you have spent or saved if you had not taken the hedge position? Oats - 5,000 bu.: cents per bu. You are the purchasing agent for a cookie company. You anticipate that your firm will need 15,000 bushels of oats in March. You decide to hedge your position today and did so at the closing price of The day. Assume that the actual market price turns out to be 261´0 on the day you actually buy the Oats. How much more would you have spent or saved if you had not taken the hedge position? Oats - 5,000 bu.: cents per bu. A) Spent $15 more. B) Spent $150 more. C) Saved $15. D) Saved $150. E) Saved $1,500.


A) Spent $15 more.
B) Spent $150 more.
C) Saved $15.
D) Saved $150.
E) Saved $1,500.

F) B) and E)
G) A) and B)

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Suppose you are interested in purchasing the September futures contract. What is the futures price of 15,000 lbs. of orange juice for September delivery?


A) $11,625
B) $12,330
C) $12,450
D) $13,863
E) $13,275

F) D) and E)
G) C) and E)

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What is the highest price per troy ounce that the July futures contract on silver has traded? Silver - 5,000 troy oz.; $ per troy oz. What is the highest price per troy ounce that the July futures contract on silver has traded? Silver - 5,000 troy oz.; $ per troy oz. A) $10.502 B) $10.509 C) $10.529 D) $10.553 E) $10.557


A) $10.502
B) $10.509
C) $10.529
D) $10.553
E) $10.557

F) B) and D)
G) A) and E)

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Monique grows and exports cocoa. Her crop was partially ruined in a storm, so she needs to purchase 20 tons of cocoa in three months to meet prior contractual obligations. Monique wants to Hedge against price changes. Each futures contract is for 10 metric tons. The current quote for the Contract is 1,447 per ton. Monique should _____ 2 futures contracts with a total contract value of:


A) Buy; $28,940.
B) Buy; $289,400.
C) Buy; $14,470.
D) Sell; $28,940.
E) Sell; $289,400.

F) A) and E)
G) D) and E)

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Cereal Delites uses corn as the primary ingredient in their cereal. As a result, the firm has a down sloping risk profile which shows that it will suffer a financial loss if the price of corn rises. To offset This risk, the firm should _____ a forward contract on corn with a payoff profile that is _____.


A) buy; down sloping
B) buy; up sloping
C) buy; horizontal
D) sell; horizontal
E) sell; up sloping

F) None of the above
G) C) and E)

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You are a cattle rancher. To lock in the sale price for your cattle, you could either sell a futures contract on cattle, or buy a futures put option on cattle.

A) True
B) False

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Company A can borrow at either an 8.5% fixed rate or a floating rate of prime + 1.75% Company B can borrow at either a floating rate of prime + 1.25% or a fixed rate of 8.65% Company A prefers a floating rate and Company B prefers a fixed rate. Which one of the following terms would be Acceptable to both Company A and B if they opted to enter an interest rate swap?


A) 8.5% fixed for prime + 1.75% floating
B) 8.6% fixed for prime + 1.2% floating
C) 8.6% fixed for prime + 1.3% floating
D) 8.65% fixed for prime + 1.3% floating
E) 8.65% fixed for prime + 1.25% floating

F) A) and B)
G) B) and E)

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The buyer of a European put has the _____ to _____ at the specified price _____ the expiration date.


A) option; buy; on or before
B) option; sell; on or before
C) option; sell; on
D) obligation; buy; on or before
E) obligation; sell; on

F) A) and C)
G) B) and E)

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A futures contract can best be defined as:


A) A forward contract with the feature that gains and losses are realized each day rather than only on the settlement date.
B) Hedging an asset with contracts written on a closely related, but not identical, 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.

F) A) and C)
G) A) and B)

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What was the lowest contract price at which 15,000 lbs. of orange juice for July delivery traded on the day quoted?


A) $11,235
B) $11,625
C) $12,330
D) $12,075
E) $12,345

F) C) and E)
G) B) and E)

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