Question 1

An agreement that grants its owner the right, but not the obligation, to buy or sell a specific asset at a specific price for a set period of time is called a(n)  _____ contract.

Accepted Answer

A)  option
B)  forward
C)  futures
D)  swap
E)  spotF) C) and E)
G) A) and B)

Question 2

Explain how a manufacturer who has an ongoing need for silver as a raw material in the production process might use futures to hedge. What does the manufacturer hope to gain?

Accepted Answer

The manufacturer needs to acquire silver...

Question 3

Most of the evidence to date indicates that firms with which two of the following characteristics are most apt to frequently use derivatives?
I. firms with low financial distress costs
II. firms with high financial distress costs
III. firms with easy access to capital markets
IV. firms with constrained access to capital markets

Accepted Answer

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

Question 4

The buyer of an option contract:

Accepted Answer

A)  receives the option premium in exchange for an obligation to either buy or sell an underlying asset.
B)  pays an option premium in exchange for a right to buy or sell an underlying asset during a specified period of time.
C)  pays the strike price at the time the option is purchased and in exchange receives the right to exercise the option at any time during the option period.
D)  receives the option premium in exchange for guaranteeing the purchase or sale of an underlying asset if called upon to do so.
E)  pays the option premium in exchange for receiving the strike price at a later date.F) B) and E)
G) C) and D)

Question 5

The National Bank has an agreement with The Foreign Bank to exchange 500,000 U.S. dollars for 380,000 Euros on the first day of each of the next 3 calendar quarters. This agreement is best described as a(n) :

Accepted Answer

A)  floating exchange.
B)  spot trade.
C)  option.
D)  futures contract.
E)  swap contract.F) All of the above
G) A) and C)

Question 6

For years, your family has operated a business that produces lawn mowers. Over the years, the industry has progressed and new mass production techniques have been developed. However, your firm cannot afford this new technology, nor can you compete against those firms that can. Thus, the family has decided to close its facility at the end of the year. Which one of the following describes the risks to which your family's firm succumbed?

Accepted Answer

A)  forward risk
B)  volatility exposure
C)  economic exposure
D)  transactions exposure
E)  translation riskF) A) and B)
G) A) and C)

Question 7

Murray's can borrow money at a fixed rate of 10.5 percent or a variable rate set at prime plus 2.25 percent. Fred's can borrow money at a variable rate of prime plus 1.5 percent or a fixed rate of 12 percent. Murray's prefers a variable rate and Fred's prefers a fixed rate. Given this information, which one of the following statements is correct?

Accepted Answer

A)  After swapping interest rates with Fred's, Murray's may be able to pay prime plus 2 percent.
B)  Both companies can profit in a swap which will allow Murray's to pay a variable rate of prime plus one percent.
C)  Fred's will end up with a fixed rate of 10 percent.
D)  Fred's has the best chance of profiting if it does an interest rate swap with Murray's.
E)  There are no terms under which Murray's and Fred's can swap interest rates.F) A) and E)
G) A) and D)

Question 8

How much will you pay per pound for a September 130 orange juice futures call option?
Orange juice - 15,000 lbs:
u.S. cents per lb.

Accepted Answer

A)  $0.0045
B)  $0.0065
C)  $0.0450
D)  $0.0650
E)  $0.1135F) A) and B)
G) C) and D)

Question 9

A payoff profile:

Accepted Answer

A)  determines the price of an option contract.
B)  determines whether a forward or a futures contract is needed.
C)  applies only to contract sellers.
D)  determines the price of a collar.
E)  illustrates potential gains and losses.F) All of the above
G) A) and E)

Question 10

Which two of the following are key differences between an option contract and a forward contract?
I. option contracts can be resold but forward contracts cannot
II. the option price is determined at settlement while the forward price is determined when the contract is initiated
III. the rights and obligations of the buyer
IV. cost when contract initiated

Accepted Answer

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

Question 11

What is cross-hedging?
 Why do you suppose firms use this method of risk management?
 What are some of the drawbacks?

Accepted Answer

Cross-hedging is hedging an asset with c...

Question 12

A graph depicting the gains and losses a seller of a forward contract would earn at various market prices is referred to as a:

Accepted Answer

A)  risk profile.
B)  payoff profile.
C)  risk offer line.
D)  scatter plot.
E)  risk-return graph.F) B) and E)
G) C) and D)

Question 13

The seller of a forward contract:

Accepted Answer

A)  is obligated to make delivery and accept the forward price.
B)  has the option of making delivery and receiving the greater of the spot price or the contract price.
C)  has the option of either making delivery or accepting delivery.
D)  is obligated to take delivery and pays the lower of the spot market price or the contract price.
E)  is obligated to take delivery and pay the forward price.F) C) and E)
G) A) and C)

Question 14

A firm with a variable-rate loan wants to protect itself from increases in interest rates. Which of the following would interest this firm?
I. interest rate floor
II. interest rate cap
III. put option on an interest rate
IV. call option on an interest rate

Accepted Answer

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

Question 15

A bakery generally enters into a forward contract in wheat as a:

Accepted Answer

A)  hedger.
B)  speculator.
C)  spot trader.
D)  broker.
E)  spectator.F) A) and E)
G) A) and D)

Question 16

You own shares of a stock and believe the stock price will increase in the future. However, you realize the stock price could decline and want to hedge that risk. Which one of the following option positions should you take to create the desired hedge?

Accepted Answer

A)  buy a call
B)  sell a call
C)  buy a put
D)  sell a put
E)  none of the aboveF) A) and C)
G) A) and B)

Question 17

Farmer Jones raises several hundred acres of corn and would suffer a significant loss should the price of corn decline at harvest time. Which one of the following would he be doing if he purchased financial securities to offset this price risk?

Accepted Answer

A)  abating
B)  deriving
C)  hedging
D)  forwarding
E)  manipulatingF) A) and E)
G) C) and D)

Question 18

Dog's can borrow money at either a fixed rate of 8.25 percent or a variable rate set at prime plus 0.5 percent. Cat's can borrow money at either a variable rate of prime plus 1 percent or a fixed rate of 8 percent. Dog's prefers a fixed rate and Cat's prefers a variable rate. Given this information, which one of the following statements is correct?

Accepted Answer

A)  After a swap with Cat's, Dog's could end up paying a fixed rate of 7.8 percent.
B)  Cat's should end up paying the prime rate if it agrees to an interest rate swap with Dog's.
C)  Both firms will profit if they swap an 8.15 percent fixed rate for a prime plus 0.75 percent variable rate.
D)  Dog's will end up paying no more than 7.75 percent as a fixed rate after a swap with Cat's.
E)  Dog's and Cat's cannot swap interest rates in a manner that will be profitable for both firms.F) D) and E)
G) C) and D)

Question 19

Steve recently sold an option that requires him to purchase 100 shares of Omega stock at $40 a share should the option owner decide to exercise the option. What type of option contract did Steve sell?

Accepted Answer

A)  futures option
B)  call option
C)  put option
D)  straddle
E)  strangleF) A) and B)
G) A) and C)

Question 20

The value of a stock option is dependent upon the value of the underlying stock. Thus, a stock option is a:

Accepted Answer

A)  forward agreement.
B)  derivative security.
C)  mezzanine asset.
D)  contingent security.
E)  junior security.F) A) and D)
G) C) and E)

Exam 23: Risk Management: An Introduction to Financial Engineering

An agreement that grants its owner the right, but not the obligation, to buy or sell a specific asset at a specific price for a set period of time is called a(n) _____ contract.

Correct Answer
verified

A graph depicting the gains and losses a seller of a forward contract would earn at various market prices is referred to as a:

Correct Answer
verified

A payoff profile:

Correct Answer
verified

Farmer Jones raises several hundred acres of corn and would suffer a significant loss should the price of corn decline at harvest time. Which one of the following would he be doing if he purchased financial securities to offset this price risk?

Correct Answer
verified

Correct Answer
verified

You own shares of a stock and believe the stock price will increase in the future. However, you realize the stock price could decline and want to hedge that risk. Which one of the following option positions should you take to create the desired hedge?

Correct Answer
verified

The National Bank has an agreement with The Foreign Bank to exchange 500,000 U.S. dollars for 380,000 Euros on the first day of each of the next 3 calendar quarters. This agreement is best described as a(n) :

Correct Answer
verified

What is cross-hedging? Why do you suppose firms use this method of risk management? What are some of the drawbacks?

Correct Answer
verified
Cross-hedging is hedging an asset with c...
View Answer

Correct Answer
verified

Explain how a manufacturer who has an ongoing need for silver as a raw material in the production process might use futures to hedge. What does the manufacturer hope to gain?

Correct Answer
verified
The manufacturer needs to acquire silver...
View Answer

The value of a stock option is dependent upon the value of the underlying stock. Thus, a stock option is a:

Correct Answer
verified

Correct Answer
verified

A bakery generally enters into a forward contract in wheat as a:

Correct Answer
verified

Correct Answer
verified

Steve recently sold an option that requires him to purchase 100 shares of Omega stock at $40 a share should the option owner decide to exercise the option. What type of option contract did Steve sell?

Correct Answer
verified

How much will you pay per pound for a September 130 orange juice futures call option? Orange juice - 15,000 lbs: u.S. cents per lb.

Correct Answer
verified

A firm with a variable-rate loan wants to protect itself from increases in interest rates. Which of the following would interest this firm? I. interest rate floor II. interest rate cap III. put option on an interest rate IV. call option on an interest rate

Correct Answer
verified

The buyer of an option contract:

Correct Answer
verified

Correct Answer
verified

The seller of a forward contract:

Correct Answer
verified

Exam 23: Risk Management: An Introduction to Financial Engineering

An agreement that grants its owner the right, but not the obligation, to buy or sell a specific asset at a specific price for a set period of time is called a(n) _____ contract.

Correct AnswerverifiedShow Answer

A graph depicting the gains and losses a seller of a forward contract would earn at various market prices is referred to as a:

Correct AnswerverifiedShow Answer

A payoff profile:

Correct AnswerverifiedShow Answer

Farmer Jones raises several hundred acres of corn and would suffer a significant loss should the price of corn decline at harvest time. Which one of the following would he be doing if he purchased financial securities to offset this price risk?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

You own shares of a stock and believe the stock price will increase in the future. However, you realize the stock price could decline and want to hedge that risk. Which one of the following option positions should you take to create the desired hedge?

Correct AnswerverifiedShow Answer

The National Bank has an agreement with The Foreign Bank to exchange 500,000 U.S. dollars for 380,000 Euros on the first day of each of the next 3 calendar quarters. This agreement is best described as a(n) :

Correct AnswerverifiedShow Answer

What is cross-hedging? Why do you suppose firms use this method of risk management? What are some of the drawbacks?

Correct AnswerverifiedCross-hedging is hedging an asset with c...View AnswerShow Answer

Correct AnswerverifiedShow Answer

Explain how a manufacturer who has an ongoing need for silver as a raw material in the production process might use futures to hedge. What does the manufacturer hope to gain?

Correct AnswerverifiedThe manufacturer needs to acquire silver...View AnswerShow Answer

The value of a stock option is dependent upon the value of the underlying stock. Thus, a stock option is a:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A bakery generally enters into a forward contract in wheat as a:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Steve recently sold an option that requires him to purchase 100 shares of Omega stock at $40 a share should the option owner decide to exercise the option. What type of option contract did Steve sell?

Correct AnswerverifiedShow Answer

How much will you pay per pound for a September 130 orange juice futures call option? Orange juice - 15,000 lbs: u.S. cents per lb.

Correct AnswerverifiedShow Answer

A firm with a variable-rate loan wants to protect itself from increases in interest rates. Which of the following would interest this firm? I. interest rate floor II. interest rate cap III. put option on an interest rate IV. call option on an interest rate

Correct AnswerverifiedShow Answer

The buyer of an option contract:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The seller of a forward contract:

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
Cross-hedging is hedging an asset with c...
View Answer

Correct Answer
verified

Correct Answer
verified
The manufacturer needs to acquire silver...
View Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
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