Question 1

When two borrowers engage in a currency swap,they agree to:

Accepted Answer

A)   trade one currency for another, thus avoiding the foreign exchange market.
B)   make payments on each other's borrowings in a different currency.
C)   pay to each other any depreciation or appreciation of the currency.
D)   exchange fixed-rate interest payments for variable-rate interest payments.E) A) and B)
F) A) and C)

Question 2

A hedger buys a futures contract that obligates the owner to take delivery of 5,000 bushels of wheat at a price of $3.30 per bushel.At expiration the spot price of wheat is $2.80 per bushel.The hedger has:

Accepted Answer

A)   saved 50¢ per bushel through hedging.
B)   gained peace of mind at a price of 50¢ per bushel.
C)   the opportunity to avoid taking delivery, since price declined.
D)   locked in an effective price of $3.05 per bushel.E) B) and D)
F) B) and C)

Question 3

The purpose of a margin account for a futures contract is to:

Accepted Answer

A)   guarantee a minimum margin of profit for the contract holder.
B)   allow futures traders to have more than one contract at once.
C)   provide a cushion for the exchange against defaults on the contract.
D)   hold interest payments until expiration.E) C) and D)
F) B) and D)

Question 4

What must happen to prices over the course of a contract for the seller of a futures contract to maximize benefits of the hedge?

Accepted Answer

A)   Prices must decrease.
B)   Prices must increase.
C)   Prices must remain constant.
D)   The seller will profit on the hedge regardless of the direction of price movements.E) C) and D)
F) All of the above

Question 5

Counterparties to an interest rate swap exchange both interest payments and principal amounts.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following is not correct concerning futures contracts?

Accepted Answer

A)   Entails an obligation rather than an option.
B)   Contract price is set at the beginning of the contract.
C)   Contracts are exchange-traded.
D)   Gains or losses are recorded at contract expiration.E) C) and D)
F) None of the above

Question 7

Futures contracts are standardized to expire at one time each year.

Accepted Answer

A) True 
 B)False

Question 8

Interest rate swaps allow both counterparties to:

Accepted Answer

A)   reduce interest expenses.
B)   avoid repayment of the notional principal.
C)   rearrange the balance sheet.
D)   pay a floating rate of interest on their debt.E) A) and B)
F) A) and C)

Question 9

At the expiration of a futures contract,the futures price will be:

Accepted Answer

A)   greater than spot price.
B)   equal to the spot price.
C)   less than the spot price.
D)   more than the forward price.E) B) and C)
F) None of the above

Question 10

Nestlé wishes to obtain a loan denominated in Swiss francs but considers the U.S.market to offer better terms.How can Nestlé accomplish this?

Accepted Answer

A)   Borrow francs in Switzerland, exchange for dollars and arrange a currency swap
B)   Borrow francs in Switzerland, exchange for dollars and arrange an interest-rate swap
C)   Borrow dollars in U.S., exchange for francs and arrange an interest-rate swap
D)   Borrow dollars in U.S., exchange for francs and arrange a currency swapE) All of the above
F) A) and D)

Question 11

Managers are willing to pay a price to hedge because:

Accepted Answer

A)   they receive increased profits in return.
B)   the returns on derivative instruments are not taxed.
C)   they value the reduction in uncertainty.
D)   it permits the managers to receive higher cash bonuses.E) C) and D)
F) A) and C)

Question 12

How might a firm such as General Mills use options to control raw material prices for breakfast cereals?

Accepted Answer

A)   Buy call options on commodities.
B)   Sell call options on commodities.
C)   Buy put options on commodities.
D)   Sell put options on commodities.E) B) and C)
F) B) and D)

Question 13

The basic difference between speculators and hedgers in futures contracts is that speculators:

Accepted Answer

A)   will profit regardless of the direction of price change.
B)   are not protecting their commodity holdings through an offsetting transaction.
C)   are concerned only with long-term price movements.
D)   take a position in more than one commodity at a time.E) B) and C)
F) All of the above

Question 14

A cotton producer has purchased cotton futures that involve 50,000 pounds of cotton at a price of $0.60 per pound.By contract expiration the producer finds that cotton prices have declined by $0.07 per pound.As a result of the futures contracts,the producer will:

Accepted Answer

A)   lose $3,500 per contract in the futures market which offsets gains in the cash market.
B)   gain $3,500 per contract in the futures market which offsets losses in the cash market.
C)   lose $3,500 per contract in the futures market and suffer an opportunity cost in the cash market.
D)   gain $3,500 per contract in the futures market and gain $0.10 per pound in the cash market.E) B) and D)
F) All of the above

Question 15

Which of the following is not generally considered a benefit of hedging?

Accepted Answer

A)   It reduces one or more aspects of business risk.
B)   It allows prices to be locked in advance.
C)   The costs of hedging are paid by the speculators.
D)   It can stabilize profits.E) All of the above
F) A) and D)

Question 16

Both the seller and the buyer in a futures contract are required to put up margins.

Accepted Answer

A) True 
 B)False

Question 17

If the market for corn futures has more prospective sellers than buyers,then one would expect:

Accepted Answer

A)   the price of corn futures to decrease.
B)   the price of corn futures to increase.
C)   some traders to change from seller to buyer.
D)   the market to cease operations until demand is rebalanced.E) None of the above
F) All of the above

Question 18

Which of the following is not correct concerning the financial futures markets?

Accepted Answer

A)   One of the prominent exchanges for financial futures is the Chicago Board of Trade.
B)   The contracts were first traded in 1972.
C)   A major use is protection from interest-rate risk.
D)   Trading in commodity futures significantly exceeds trading in financial futures.E) B) and D)
F) A) and B)

Question 19

Under what conditions can the use of options actually be detrimental to the firm's profitability?

Accepted Answer

In the case of buying option contracts,e...

Question 20

How can companies use swaps to change the risk of securities they have issued?

Accepted Answer

Swaps allow firms to exchange one series...

Exam 26: Risk Management

Managers are willing to pay a price to hedge because:

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Which of the following is not generally considered a benefit of hedging?

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Counterparties to an interest rate swap exchange both interest payments and principal amounts.

Correct AnswerverifiedShow Answer

A cotton producer has purchased cotton futures that involve 50,000 pounds of cotton at a price of $0.60 per pound.By contract expiration the producer finds that cotton prices have declined by $0.07 per pound.As a result of the futures contracts,the producer will:

Correct AnswerverifiedShow Answer

Futures contracts are standardized to expire at one time each year.

Correct AnswerverifiedShow Answer

How might a firm such as General Mills use options to control raw material prices for breakfast cereals?

Correct AnswerverifiedShow Answer

Which of the following is not correct concerning the financial futures markets?

Correct AnswerverifiedShow Answer

Under what conditions can the use of options actually be detrimental to the firm's profitability?

Correct AnswerverifiedIn the case of buying option contracts,e...View AnswerShow Answer

At the expiration of a futures contract,the futures price will be:

Correct AnswerverifiedShow Answer

Interest rate swaps allow both counterparties to:

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The basic difference between speculators and hedgers in futures contracts is that speculators:

Correct AnswerverifiedShow Answer

Both the seller and the buyer in a futures contract are required to put up margins.

Correct AnswerverifiedShow Answer

Nestlé wishes to obtain a loan denominated in Swiss francs but considers the U.S.market to offer better terms.How can Nestlé accomplish this?

Correct AnswerverifiedShow Answer

Which of the following is not correct concerning futures contracts?

Correct AnswerverifiedShow Answer

What must happen to prices over the course of a contract for the seller of a futures contract to maximize benefits of the hedge?

Correct AnswerverifiedShow Answer

If the market for corn futures has more prospective sellers than buyers,then one would expect:

Correct AnswerverifiedShow Answer

A hedger buys a futures contract that obligates the owner to take delivery of 5,000 bushels of wheat at a price of $3.30 per bushel.At expiration the spot price of wheat is $2.80 per bushel.The hedger has:

Correct AnswerverifiedShow Answer

The purpose of a margin account for a futures contract is to:

Correct AnswerverifiedShow Answer

How can companies use swaps to change the risk of securities they have issued?

Correct AnswerverifiedSwaps allow firms to exchange one series...View AnswerShow Answer

When two borrowers engage in a currency swap,they agree to:

Correct AnswerverifiedShow Answer

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In the case of buying option contracts,e...
View Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Swaps allow firms to exchange one series...
View Answer

Correct Answer
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