Question 1

You believe the price of an asset is going to increase within the next three months. Which one of the following payoff profiles for an option on that asset will reflect a profit if your belief is correct?

Accepted Answer

A)   Buying a put
B)   Selling a call
C)   Buying a call
D)   Selling a put
E)   Selling both a call and a putF) B) and D)
G) B) and C)

Question 2

All of the following are futures exchanges except:

Accepted Answer

A)   CBT.
B)   CME.
C)   LIFFE.
D)   NYSE.
E)   NYMEX.F) B) and D)
G) A) and C)

Question 3

Which type of insurance helps replace a company's income during the time period the company is closed due to a major hurricane?

Accepted Answer

A)   Business interruption insurance
B)   Employer's liability insurance
C)   Property insurance
D)   Vehicle insurance
E)   Commercial liability insuranceF) D) and E)
G) B) and D)

Question 4

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

Question 5

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)   No option position will create the desired hedge.F) A) and B)
G) C) and E)

Question 6

This morning a national bakery agreed to pay a farmer $7.10 a bushel for 5,000 bushels of wheat that the farmer will deliver to the bakery four months from now. Payment will be made at the time of delivery. What is this legally binding agreement called?

Accepted Answer

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

Question 7

Futures contracts on palladium are based on 50 troy ounces and are priced in dollars per troy ounce. Assume today's open price on one May contract was 758.90 and the settle price was 756.10. You own three May contracts which you purchased at a quote of 749.30. What is your total profit or loss to date?

Accepted Answer

A)   $1,020
B)   −$1,545
C)   −$420
D)   −$1,020
E)   $1,545F) A) and B)
G) C) and D)

Question 8

Steve has an option with a payoff profile that depicts a line that is constant at zero up until some point after which the line slopes downward. What type of action did Steve take to obtain this profile?

Accepted Answer

A)   Purchased a call option
B)   Purchased a put option
C)   Sold a call option
D)   Sold a put option
E)   Purchased and simultaneously sold the same call optionF) A) and B)
G) C) and E)

Question 9

Which one of the following is true regarding forward contracts?

Accepted Answer

A)   The upfront costs to enter a forward contract can be significant.
B)   If a buyer of a forward contract earns a $200 profit, then the seller will also profit by $200.
C)   The buyer wins when market prices are less than the forward price.
D)   The payoff profile for the buyer of a forward contract is an upward sloping linear function.
E)   If the seller of a forward contract earns a profit, then the buyer has neither a profit nor a loss.F) A) and E)
G) D) and E)

Question 10

Browning Enterprises currently has all fixed-rate debt. The firm would like to convert part of this to floating-rate debt. Which one of the following will accomplish this for the firm?

Accepted Answer

A)   Option on floating-rate bonds
B)   Forward contract on U.S. Treasury bills
C)   Interest rate swap
D)   Currency swap
E)   Interest rate call optionF) B) and E)
G) C) and D)

Question 11

A forward contract:

Accepted Answer

A)   requires that payment be made in full when the contract is originated.
B)   provides the buyer with an option to buy an asset on the settlement date at the forward price.
C)   is a binding agreement on both the buyer and the seller and nets out as a zero sum game.
D)   is marked to the market daily at the seller's request.
E)   allows for immediate delivery at an agreed upon price which is to be paid on the settlement date.F) A) and D)
G) B) and C)

Question 12

Ethanol futures contracts are based on 29,000 gallons and are priced in dollars per gallon. Assume the end-of-day report on a contract show prices of: Open 2.220, High 2.231, Low 2.181, and Settle 2.186. What is the maximum profit that an investor could have earned by buying and selling one of these contracts on this day?

Accepted Answer

A)   $1,131
B)   $1,450
C)   $942
D)   $2,436
E)   $986F) A) and B)
G) A) and C)

Question 13

Which one of the following statements is correct in relation to a firm's short-run financial risk?

Accepted Answer

A)   Short-run financial risk results from permanent changes in prices due to new technology.
B)   A financially sound firm can become financially distressed as the result of its short-run exposure to financial risk.
C)   Each segment of a business entity should be responsible for hedging its own short-run financial risk.
D)   Short-run financial risk is defined as changes resulting from fundamental shifts in the underlying economics of a business.
E)   Thus far, hedging techniques have been unsuccessful in reducing short-run financial risk.F) C) and E)
G) C) and D)

Question 14

Farmer Ted planted 200 acres in wheat this year. The weather has been perfect and he expects to harvest a record crop within the next two weeks. At present, he has no storage facilities and therefore must sell his crop as soon as it is harvested. Which one of the following risks is he facing because he must sell his crop at whatever the market price is at harvest time?

Accepted Answer

A)   Futures risk
B)   Volatility exposure
C)   Economic exposure
D)   Transactions exposure
E)   Translation exposureF) C) and E)
G) A) and B)

Question 15

American option contracts:

Accepted Answer

A)   are exercised at the discretion of the contract seller.
B)   obligate the buyer but not the seller.
C)   can be exercised on any day up to and including the expiration date.
D)   are marked to market on a daily basis.
E)   are only available on publicly traded stocks.F) A) and D)
G) A) and B)

Question 16

An interest rate cap is actually a:

Accepted Answer

A)   forward contract on interest rates.
B)   put option on a bond.
C)   call option on an interest rate.
D)   deferred interest rate swap.
E)   put option on an interest rate.F) C) and D)
G) A) and E)

Question 17

A U.S. bank has an agreement with a German bank to exchange $500,000 for €397,000 on the first day of each of the next three calendar quarters. This agreement is best described as a:

Accepted Answer

A)   floating exchange.
B)   spot trade.
C)   currency option.
D)   futures contract.
E)   swap contract.F) A) and B)
G) D) and E)

Question 18

Suppose an investor buys a call option on 45,000 barrels of oil with an exercise price of $51 per barrel and simultaneously sells a put option on 45,000 barrels of oil with the same exercise price of $51 per barrel. Her net payoff per barrel on these option contracts is ________ if the market price per barrel is $49 and ________ if the price per barrel is $55.

Accepted Answer

A)   −$4; $2
B)   −$2; $0
C)   $0; $2
D)   $0; −$4
E)   −$2; $4F) None of the above
G) A) and B)

Question 19

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)   Insuring
B)   Deriving
C)   Hedging
D)   Forwarding
E)   ManipulatingF) All of the above
G) B) and D)

Question 20

Which type of risk is related to damages arising from a natural disaster?

Accepted Answer

A)   Financial risk
B)   Strategic risk
C)   Hazard risk
D)   Occupational risk
E)   Operational riskF) A) and D)
G) A) and C)

Exam 23: Enterprise Risk Management

Steve has an option with a payoff profile that depicts a line that is constant at zero up until some point after which the line slopes downward. What type of action did Steve take to obtain this profile?

Correct Answer
verified

You believe the price of an asset is going to increase within the next three months. Which one of the following payoff profiles for an option on that asset will reflect a profit if your belief is correct?

Correct Answer
verified

A U.S. bank has an agreement with a German bank to exchange $500,000 for €397,000 on the first day of each of the next three calendar quarters. This agreement is best described as a:

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

Browning Enterprises currently has all fixed-rate debt. The firm would like to convert part of this to floating-rate debt. Which one of the following will accomplish this for the firm?

Correct Answer
verified

A forward contract:

Correct Answer
verified

Which type of insurance helps replace a company's income during the time period the company is closed due to a major hurricane?

Correct Answer
verified

Which type of risk is related to damages arising from a natural disaster?

Correct Answer
verified

Which one of the following statements is correct in relation to a firm's short-run financial risk?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

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

An interest rate cap is actually a:

Correct Answer
verified

All of the following are futures exchanges except:

Correct Answer
verified

Correct Answer
verified

This morning a national bakery agreed to pay a farmer $7.10 a bushel for 5,000 bushels of wheat that the farmer will deliver to the bakery four months from now. Payment will be made at the time of delivery. What is this legally binding agreement called?

Correct Answer
verified

Which one of the following is true regarding forward contracts?

Correct Answer
verified

American option contracts:

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

Exam 23: Enterprise Risk Management

Steve has an option with a payoff profile that depicts a line that is constant at zero up until some point after which the line slopes downward. What type of action did Steve take to obtain this profile?

Correct AnswerverifiedShow Answer

You believe the price of an asset is going to increase within the next three months. Which one of the following payoff profiles for an option on that asset will reflect a profit if your belief is correct?

Correct AnswerverifiedShow Answer

A U.S. bank has an agreement with a German bank to exchange $500,000 for €397,000 on the first day of each of the next three calendar quarters. This agreement is best described as a:

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

Browning Enterprises currently has all fixed-rate debt. The firm would like to convert part of this to floating-rate debt. Which one of the following will accomplish this for the firm?

Correct AnswerverifiedShow Answer

A forward contract:

Correct AnswerverifiedShow Answer

Which type of insurance helps replace a company's income during the time period the company is closed due to a major hurricane?

Correct AnswerverifiedShow Answer

Which type of risk is related to damages arising from a natural disaster?

Correct AnswerverifiedShow Answer

Which one of the following statements is correct in relation to a firm's short-run financial risk?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

An interest rate cap is actually a:

Correct AnswerverifiedShow Answer

All of the following are futures exchanges except:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

This morning a national bakery agreed to pay a farmer $7.10 a bushel for 5,000 bushels of wheat that the farmer will deliver to the bakery four months from now. Payment will be made at the time of delivery. What is this legally binding agreement called?

Correct AnswerverifiedShow Answer

Which one of the following is true regarding forward contracts?

Correct AnswerverifiedShow Answer

American option contracts:

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

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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