Question 1

Which one of the following actions would provide you with the right, but not the obligation, to purchase the underlying asset during a specified period of time?

Accepted Answer

A)   the purchase of a call option
B)   the sale of a call option
C)   the purchase of a put option
D)   the sale of a put option
E)   the swap of a put optionF) B) and E)
G) D) and E)

Question 2

Aaron purchased a call on 35,000 bushels of corn with a strike price of 210. On the expiration date, the corn was selling at $1.98 per bushel. Option contracts on corn are based on 5,000 bushels. Ignore the cost of the call and all transaction costs. What is the payoff on the call contract?

Accepted Answer

A)   -$4,200
B)   -$2,100
C)   $0
D)   $2,100
E)   $4,200F) B) and E)
G) C) and E)

Question 3

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

Accepted Answer

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

Question 4

The increased exchange rate volatility can be directly linked to:

Accepted Answer

A)   Price volatility.
B)   The Bank of Canada.
C)   International trade.
D)   The breakdown of the Bretton Woods agreement.
E)   The Toronto Stock Exchange.F) A) and C)
G) A) and B)

Question 5

Using two graphs, illustrate the payoff profiles of buying a call and of selling a put.

Accepted Answer

Students should dupl...

Question 6

Which of the following is the best definition of Hedging?

Accepted Answer

A)   Long-term financial risk arising from permanent changes in prices or other economic fundamentals.
B)   A legally binding agreement between two parties calling for the sale of an asset or product in the future at a price agreed upon today.
C)   A forward contract with the feature that gains and losses are realized each day rather than only on the settlement date.
D)   Reducing a firm's exposure to price or rate fluctuations.
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) C) and D)
G) A) and B)

Question 7

Hedging done at a divisional level can increase the overall financial risk of a firm.

Accepted Answer

A) True 
 B)False

Question 8

You sell 10 gold futures contracts when the futures price is $342.70 per ounce (each contract is for 100 ounces) . The price on the maturity date is $302.30. What is your payoff?

Accepted Answer

A)   -$40,400
B)   -$4,040
C)   $404
D)   $4,040
E)   $40,400F) B) and E)
G) None of the above

Question 9

Interest rate swaps can benefit both the buyer and the seller.

Accepted Answer

A) True 
 B)False

Question 10

A study of derivatives use by Canadian corporations reported that, of those firms that use derivatives, most use derivatives to manage foreign exchange exposure. Why do you suppose this is? Why not manage something more crucial such as the cost of inputs for production?

Accepted Answer

Students will likely give a great variet...

Question 11

Gains and losses on futures contracts are realized:

Accepted Answer

A)   Only on the settlement day.
B)   If the contract is exercised, otherwise, they are never realized.
C)   Only if the buyer finds it profitability to exercise the contract.
D)   On a daily basis through a process known as marking-to-market.
E)   Only at the time the contracts mature.F) None of the above
G) A) and B)

Question 12

Which of the following items obligates the writer to sell an asset at a specified price if the holder chooses to exercise?

Accepted Answer

A)   Put option
B)   Call option
C)   Forward contract
D)   Futures contract
E)   Swap contractF) B) and C)
G) A) and E)

Question 13

Long-run financial risk:

Accepted Answer

A)   Includes conditions such as low grain prices in a particular year.
B)   Is easier to hedge over time than short-run financial risk.
C)   Is related more too near-term transactions than to advancements in technology.
D)   Generally results from changes in the underlying economics of a business.
E)   Can generally be hedged such that the financial viability of a firm is protected.F) A) and B)
G) A) and C)

Question 14

Which one of the following statements concerning risk is correct?

Accepted Answer

A)   The financial risk of a firm is NOT affected by the capital structure of that firm.
B)   An international firm has less exchange rate risk than a national firm.
C)   A firm can lower its financial risk by lengthening the term of its debt.
D)   The goal of financial engineering is to totally eliminate the financial risk of a firm.
E)   A firm can reduce its financial risk by combining various types of operations.F) A) and B)
G) None of the above

Question 15

A key difference between an option contract and a forward contract is that option contracts can be resold but forward contracts cannot.

Accepted Answer

A) True 
 B)False

Question 16

A cereal company generally enters into a forward contract in wheat as a:

Accepted Answer

A)   Hedger.
B)   Speculator.
C)   Spot trader.
D)   Broker.
E)   Spectator.F) B) and E)
G) A) and E)

Question 17

Which of the following describes a perfect hedge?

Accepted Answer

A)   On net, the hedger can only make money if prices change.
B)   On net, the hedger can only lose money if prices change.
C)   On net, the hedger can either make or lose money if prices change.
D)   On net, the hedger can neither make nor lose money if prices change.
E)   On net, prices will not change, so hedging is a worthless exercise.F) B) and E)
G) C) and D)

Question 18

Which of the following is the best definition of transactions exposure?

Accepted Answer

A)   A plot showing the gains and losses that will occur on a contract as the result of unexpected price changes.
B)   An option that gives the owner the right, but not the obligation, to sell an asset.
C)   A plot showing how the value of the firm is affected by changes in prices or rates.
D)   An agreement by two parties to exchange, or swap, specified cash flows at specified intervals in the future.
E)   Short-run financial risk arising from the need to buy or sell at uncertain prices or rates in the near future.F) C) and D)
G) All of the above

Question 19

You buy one futures contract for 5,000 bushels of soybeans with a settlement price of $6.92 per bushel. If the price is $7.58 per bushel at the contract expiration, what is your payoff?

Accepted Answer

A)   -$37,900
B)   -$3,300
C)   $2,130
D)   $3,300
E)   $37,900F) A) and D)
G) A) and C)

Question 20

You are the buyer for a cereal company. You think you will need 230,000 bushels of corn next month. The futures contracts on corn are based on 5,000 bushels and are currently quoted at 261.60 cents per bushel for delivery next month. If you want to hedge your cost risk, you should _____ contracts at a current value of _____ per contract.

Accepted Answer

A)   buy 46; $13,080
B)   buy 230; $60,168
C)   sell 46; $601,680
D)   sell 230; $13,080,000
E)   sell 46; $60,168,000F) None of the above
G) B) and D)

Exam 24: Enterprise Risk Management

Which of the following is the best definition of transactions exposure?

Correct Answer
verified

Using two graphs, illustrate the payoff profiles of buying a call and of selling a put.

Correct Answer
verified
Students should dupl...
View Answer

Which of the following items obligates the writer to sell an asset at a specified price if the holder chooses to exercise?

Correct Answer
verified

Interest rate swaps can benefit both the buyer and the seller.

Correct Answer
verified

Which of the following is the best definition of Hedging?

Correct Answer
verified

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

Correct Answer
verified

A key difference between an option contract and a forward contract is that option contracts can be resold but forward contracts cannot.

Correct Answer
verified

You buy one futures contract for 5,000 bushels of soybeans with a settlement price of $6.92 per bushel. If the price is $7.58 per bushel at the contract expiration, what is your payoff?

Correct Answer
verified

A cereal company generally enters into a forward contract in wheat as a:

Correct Answer
verified

Which one of the following statements concerning risk is correct?

Correct Answer
verified

Which of the following describes a perfect hedge?

Correct Answer
verified

A study of derivatives use by Canadian corporations reported that, of those firms that use derivatives, most use derivatives to manage foreign exchange exposure. Why do you suppose this is? Why not manage something more crucial such as the cost of inputs for production?

Correct Answer
verified
Students will likely give a great variet...
View Answer

Long-run financial risk:

Correct Answer
verified

The increased exchange rate volatility can be directly linked to:

Correct Answer
verified

Hedging done at a divisional level can increase the overall financial risk of a firm.

Correct Answer
verified

Aaron purchased a call on 35,000 bushels of corn with a strike price of 210. On the expiration date, the corn was selling at $1.98 per bushel. Option contracts on corn are based on 5,000 bushels. Ignore the cost of the call and all transaction costs. What is the payoff on the call contract?

Correct Answer
verified

Which one of the following actions would provide you with the right, but not the obligation, to purchase the underlying asset during a specified period of time?

Correct Answer
verified

Correct Answer
verified

You sell 10 gold futures contracts when the futures price is $342.70 per ounce (each contract is for 100 ounces) . The price on the maturity date is $302.30. What is your payoff?

Correct Answer
verified

Gains and losses on futures contracts are realized:

Correct Answer
verified

Exam 24: Enterprise Risk Management

Which of the following is the best definition of transactions exposure?

Correct AnswerverifiedShow Answer

Using two graphs, illustrate the payoff profiles of buying a call and of selling a put.

Correct AnswerverifiedStudents should dupl...View AnswerShow Answer

Which of the following items obligates the writer to sell an asset at a specified price if the holder chooses to exercise?

Correct AnswerverifiedShow Answer

Interest rate swaps can benefit both the buyer and the seller.

Correct AnswerverifiedShow Answer

Which of the following is the best definition of Hedging?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A key difference between an option contract and a forward contract is that option contracts can be resold but forward contracts cannot.

Correct AnswerverifiedShow Answer

You buy one futures contract for 5,000 bushels of soybeans with a settlement price of $6.92 per bushel. If the price is $7.58 per bushel at the contract expiration, what is your payoff?

Correct AnswerverifiedShow Answer

A cereal company generally enters into a forward contract in wheat as a:

Correct AnswerverifiedShow Answer

Which one of the following statements concerning risk is correct?

Correct AnswerverifiedShow Answer

Which of the following describes a perfect hedge?

Correct AnswerverifiedShow Answer

A study of derivatives use by Canadian corporations reported that, of those firms that use derivatives, most use derivatives to manage foreign exchange exposure. Why do you suppose this is? Why not manage something more crucial such as the cost of inputs for production?

Correct AnswerverifiedStudents will likely give a great variet...View AnswerShow Answer

Long-run financial risk:

Correct AnswerverifiedShow Answer

The increased exchange rate volatility can be directly linked to:

Correct AnswerverifiedShow Answer

Hedging done at a divisional level can increase the overall financial risk of a firm.

Correct AnswerverifiedShow Answer

Aaron purchased a call on 35,000 bushels of corn with a strike price of 210. On the expiration date, the corn was selling at $1.98 per bushel. Option contracts on corn are based on 5,000 bushels. Ignore the cost of the call and all transaction costs. What is the payoff on the call contract?

Correct AnswerverifiedShow Answer

Which one of the following actions would provide you with the right, but not the obligation, to purchase the underlying asset during a specified period of time?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

You sell 10 gold futures contracts when the futures price is $342.70 per ounce (each contract is for 100 ounces) . The price on the maturity date is $302.30. What is your payoff?

Correct AnswerverifiedShow Answer

Gains and losses on futures contracts are realized:

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified
Students should dupl...
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
verified
Students will likely give a great variet...
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
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