Question 1

Long-run financial risk:

Accepted Answer

A)   can frequently be hedged on a permanent basis.
B)   is best hedged on a division by division basis within a conglomerate.
C)   is related more to 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 E)
G) A) and C)

Question 2

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

Question 3

A call option contract:

Accepted Answer

A)   obligates both the buyer and the seller.
B)   obligates the buyer but not the seller.
C)   grants rights to the buyer and obligates the seller.
D)   grants rights to the seller and obligates the buyer.
E)   grants rights to both the buyer and the seller but does not obligate either party.F) B) and E)
G) A) and E)

Question 4

Southern Groves raises tangerines. To hedge its risk, the firm trades in the orange futures market. This process is known as:

Accepted Answer

A)   secondary trading.
B)   open trading.
C)   open-hedging.
D)   cross-hedging.
E)   perfect-hedging.F) B) and D)
G) B) and C)

Question 5

Which one of the following methods of setting prices would reduce the transactions exposure for both the buyer and seller of a commodity swap contract?

Accepted Answer

A)   Setting a permanent price at which a commodity will be traded
B)   Setting the price at the minimum spot price during a given period of time
C)   Setting the price equal to the spot price on the delivery date
D)   Using the average market price over a given period of time
E)   Setting the contract price equal to some percentage, less than 100 percent, of the market price on any given dayF) B) and E)
G) B) and D)

Question 6

You need 70,000 bushels of corn for your production operations next month. The futures contracts on corn are based on 5,000 bushels and are currently quoted at 371.25 cents per bushel for delivery next month. If you want to hedge your cost, you should ________ contracts at a cost of ________ per contract.

Accepted Answer

A)   Buy 12; $2,570
B)   Buy 14; $18,562.50
C)   Buy 16; $22,570.00
D)   Sell 14; $18,562.50
E)   Sell 16; $22,570.00F) A) and E)
G) A) and D)

Question 7

Which one of the following actions will provide you with the right, but not the obligation, to sell the underlying asset at a specified price during a specified period of time?

Accepted Answer

A)   Purchase of a call option
B)   Sale of a call option
C)   Purchase of a put option
D)   Sale of a put option
E)   SwapF) A) and B)
G) C) and D)

Question 8

You expect to deliver 50,000 bushels of wheat to the market in July. Assume you hedged your position by selling futures contracts on half of your expected delivery at a price of 443.25. The futures contracts are based on 5,000 bushels and are priced in cents per bushel. Assume the market price turns out to be 445.75 when you actually deliver the wheat. How much more or less would you have earned if you had not bought the futures contracts?

Accepted Answer

A)   $1,250 less
B)   $625 less
C)   $0
D)   $625 more
E)   $1,250 moreF) C) and E)
G) B) and E)

Question 9

By hedging short-term financial risk, a firm can:

Accepted Answer

A)   ensure a steady rate of return for its shareholders.
B)   eliminate price changes over the long-term.
C)   ensure its own economic viability.
D)   gain time to adapt to changing market conditions.
E)   eliminate its exposure to price increases in raw materials.F) A) and D)
G) B) and E)

Question 10

Which one of the following actions obligates you only on the expiration date to sell an asset at the strike price if the option is exercised?

Accepted Answer

A)   Writing an American call
B)   Buying an American put
C)   Writing a European call
D)   Buying a European put
E)   Entering a European swapF) B) and C)
G) C) and D)

Question 11

Futures contracts on gold are based on 100 troy ounces and priced in dollars per troy ounce. Assume the January gold contract settled today at 1285.10 and opened at 1284.60. The April contract settled at 1285.30 and opened at 1285. You own four of the April contracts that you purchased at 1284.70. What is your total profit or loss to date?

Accepted Answer

A)   $160
B)   $240
C)   $40
D)   $120
E)   $60F) A) and B)
G) A) and C)

Question 12

The cost to purchase an option contract is called the:

Accepted Answer

A)   strike price.
B)   rights price.
C)   premium.
D)   exercise price.
E)   payoff price.F) B) and D)
G) A) and D)

Question 13

The futures contract on silver is based on 5,000 troy ounces and is priced in dollars and cents per troy ounce. Assume today's report reflects these prices for the June contract: Open 19.435, High 19.450, Low 19.025, Settle 19.119, and Chg .369. What is the price per troy ounce that will be used for today's marking-to-market for this contract?

Accepted Answer

A)   $19.435
B)   $19.450
C)   $19.025
D)   $19.081
E)   $19.119F) B) and C)
G) A) and C)

Question 14

The futures contract on silver is based on 5,000 troy ounces and is priced in dollars and cents per troy ounce. Assume today's report reflects these prices for the June contract: Open 19.435, High 19.450, Low 19.025, Settle 19.119, and Chg .369. What was the highest price per troy ounce for the silver futures contract on this day?

Accepted Answer

A)   $19.435
B)   $19.450
C)   $19.819
D)   $19.025
E)   $19.119F) A) and B)
G) A) and C)

Question 15

You decided to speculate in the market and sold six platinum futures contracts when the futures price was $1,391.20 per troy ounce. The price on the contract maturity date was $1,395. The contract size is 50 troy ounces. What was your total profit or loss on the settlement day if you had to cover your position in the spot market?

Accepted Answer

A)   $190
B)   $1,140
C)   −$190
D)   $50
E)   −$1,140F) A) and E)
G) C) and D)

Question 16

A hedge between which two of the following firms is most apt to reduce each firm's financial risk exposure?

Accepted Answer

A)   Wheat farmer and bakery
B)   Oil producer and coal miner
C)   Wheat grower and pharmaceutical firm
D)   Pastry bakery and cotton farmer
E)   Shoe manufacturer and coat manufacturerF) D) and E)
G) B) and D)

Question 17

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) D) and E)

Question 18

You would like the right to purchase an interest rate cap in the future. To obtain this right, you should purchase a:

Accepted Answer

A)   floor.
B)   swap.
C)   caption.
D)   collar.
E)   hat.F) C) and D)
G) A) and B)

Question 19

A swap dealer in the U.S.:

Accepted Answer

A)   acts solely as a seller of swap contracts.
B)   matches buyers to sellers.
C)   only deals if its book is matched.
D)   is frequently a commercial bank.
E)   trades electronically via NASDAQ.F) A) and B)
G) B) and C)

Question 20

Silver futures contracts are based on 5,000 troy ounces and are priced in dollars per troy ounce. Suppose a closing report displays these prices for a December contract: Open 17.435, High 17.450, Low 17.025, and Settle 17.119. What is the closing value for two December futures contracts on silver?

Accepted Answer

A)   $174,350
B)   $174,500
C)   $170,250
D)   $171,190
E)   $172,770F) C) and E)
G) B) and D)

Exam 23: Enterprise Risk Management

Which one of the following methods of setting prices would reduce the transactions exposure for both the buyer and seller of a commodity swap contract?

Correct Answer
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You need 70,000 bushels of corn for your production operations next month. The futures contracts on corn are based on 5,000 bushels and are currently quoted at 371.25 cents per bushel for delivery next month. If you want to hedge your cost, you should contracts at a cost of per contract.

Correct Answer
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The cost to purchase an option contract is called the:

Correct Answer
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Which one of the following actions obligates you only on the expiration date to sell an asset at the strike price if the option is exercised?

Correct Answer
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A swap dealer in the U.S.:

Correct Answer
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The seller of a forward contract:

Correct Answer
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A call option contract:

Correct Answer
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A hedge between which two of the following firms is most apt to reduce each firm's financial risk exposure?

Correct Answer
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Southern Groves raises tangerines. To hedge its risk, the firm trades in the orange futures market. This process is known as:

Correct Answer
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Correct Answer
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By hedging short-term financial risk, a firm can:

Correct Answer
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Silver futures contracts are based on 5,000 troy ounces and are priced in dollars per troy ounce. Suppose a closing report displays these prices for a December contract: Open 17.435, High 17.450, Low 17.025, and Settle 17.119. What is the closing value for two December futures contracts on silver?

Correct Answer
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Correct Answer
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Long-run financial risk:

Correct Answer
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You would like the right to purchase an interest rate cap in the future. To obtain this right, you should purchase a:

Correct Answer
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Which one of the following actions will provide you with the right, but not the obligation, to sell the underlying asset at a specified price during a specified period of time?

Correct Answer
verified

Exam 23: Enterprise Risk Management

Which one of the following methods of setting prices would reduce the transactions exposure for both the buyer and seller of a commodity swap contract?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The cost to purchase an option contract is called the:

Correct AnswerverifiedShow Answer

Which one of the following actions obligates you only on the expiration date to sell an asset at the strike price if the option is exercised?

Correct AnswerverifiedShow Answer

A swap dealer in the U.S.:

Correct AnswerverifiedShow Answer

The seller of a forward contract:

Correct AnswerverifiedShow Answer

A call option contract:

Correct AnswerverifiedShow Answer

A hedge between which two of the following firms is most apt to reduce each firm's financial risk exposure?

Correct AnswerverifiedShow Answer

Southern Groves raises tangerines. To hedge its risk, the firm trades in the orange futures market. This process is known as:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

By hedging short-term financial risk, a firm can:

Correct AnswerverifiedShow Answer

Silver futures contracts are based on 5,000 troy ounces and are priced in dollars per troy ounce. Suppose a closing report displays these prices for a December contract: Open 17.435, High 17.450, Low 17.025, and Settle 17.119. What is the closing value for two December futures contracts on silver?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Long-run financial risk:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

You would like the right to purchase an interest rate cap in the future. To obtain this right, you should purchase a:

Correct AnswerverifiedShow Answer

Which one of the following actions will provide you with the right, but not the obligation, to sell the underlying asset at a specified price during a specified period of time?

Correct AnswerverifiedShow Answer

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