Question 1

Which one of these statements related to forward contracts is correct?

Accepted Answer

A)   The buyer of a forward contract on corn benefits if the price of corn increases during the contract period.
B)   The buyer of a forward contract has the right, but not the obligation, to execute the contract any time up to and including the settlement date.
C)   Forward contracts cannot be sold but must be executed by the original parties to the contract.
D)   Forward contracts recognize profits and losses on a daily basis.
E)   The price at which a forward contract closes is set equal to the closing spot price on the settlement date.F) B) and C)
G) B) and D)

Question 2

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) All of the above
G) A) and B)

Question 3

Futures contracts:

Accepted Answer

A)   are identical to forward contracts except for the size of the contract.
B)   provide an option to purchase an asset at a specified price on the settlement date.
C)   are marked to the market on a daily basis which helps eliminate credit risk.
D)   are less popular in organized trading then are forward contracts.
E)   are limited to contracts on financial assets.F) D) and E)
G) A) and E)

Question 4

When a futures call option on a commodity is exercised the option owner receives a futures contract on the commodity plus a cash payment equal to the difference between the:

Accepted Answer

A)   current options price and the current futures price.
B)   spot and forward futures prices.
C)   strike price on the option and the current futures price.
D)   exercise price and the current options price.
E)   exercise price and the strike price.F) None of the above
G) B) and E)

Question 5

Suppose that last month you purchased ten January crude oil futures contracts at a quoted price of 53.88. These contracts are based on 1,000 barrels and quoted in dollars per barrel. Assume the actual price per barrel is $56.20 in January. How much did you gain or lose by hedging your position?

Accepted Answer

A)   $23,200
B)   $2,320
C)   $0
D)   −$2,320
E)   −$23,200F) B) and D)
G) A) and B) A

Question 6

In any one year, the chance that you will incur a loss of $10 million is .02 percent. Otherwise, you will have zero loss. What is your expected loss?

Accepted Answer

A)   $20,000
B)   $200,000
C)   $2,000
D)   $200
E)   $2,000,000F) None of the above
G) A) and D)

Question 7

A firm with a variable-rate loan wants to protect itself solely from increases in interest rates. Which one of the following would be of most interest to this firm?

Accepted Answer

A)   Create an interest rate collar
B)   Create an interest rate floor
C)   Buy a put option on interest rates
D)   Enter a currency futures contract
E)   Buy a put option on a bondF) None of the above
G) B) and C)

Question 8

By definition, which one of the following contracts is marked to the market on a daily basis?

Accepted Answer

A)   Forward contract
B)   Spot contract
C)   Option contract
D)   Swap
E)   Futures contractF) A) and C)
G) B) and D)

Question 9

The first step in risk management is to:

Accepted Answer

A)   purchase liability insurance.
B)   create an emergency cash fund.
C)   establish prevention programs.
D)   eliminate all international risks.
E)   identify and eliminate all strategic risks.F) A) and C)
G) B) and E)

Question 10

Futures option quotes include an apostrophe. This apostrophe indicates the contracts are traded:

Accepted Answer

A)   only at the end of day price.
B)   weekly.
C)   in eighths.
D)   in 64ths.
E)   in 32nds.F) B) and E)
G) C) and E)

Question 11

Suppose you sold three September cocoa futures contracts at a price quote of 1,696. Cocoa futures contracts are based on 10 metric tons and priced in dollars per ton. What will be your profit or loss on this contract if the price turns out to be $1,707 per metric ton at expiration?

Accepted Answer

A)   $330
B)   −$330
C)   $110
D)   −$110
E)   $150F) A) and E)
G) B) and E) B

Question 12

Which type of insurance protects against the risks related to a defective manufactured product?

Accepted Answer

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

Question 13

Assume you are looking at a payoff profile for a forward contract on oil. Which one of these statements correctly describes what you are seeing?

Accepted Answer

A)   From the buyer's perspective, the payoff profile is downward sloping.
B)   From both the buyer's and the seller's perspectives, the payoff profile is upward sloping.
C)   The vertical axis depicts changes in the price of oil.
D)   From the seller's perspective, the payoff profile is downward sloping.
E)   The horizontal axis represents the changes in contract value.F) C) and D)
G) A) and B)

Question 14

Company A can borrow money at a fixed rate of 7.5 percent or a variable rate set at prime plus 1 percent. Company B can borrow money at a variable rate of prime plus .5 percent or a fixed rate of 8 percent. Company A prefers a variable rate and Company B prefers a fixed rate. Which one of the following statements depicts the most favorable outcome of a swap between Companies A and B?

Accepted Answer

A)   Company A could pay a fixed rate of 7.25 percent.
B)   Company A could pay a fixed rate of 7.75 percent.
C)   Company B could pay a fixed rate of 8 percent.
D)   Company B could pay the variable prime rate + 1 percent.
E)   Company A could pay the variable prime rate + .75 percent.F) A) and B)
G) A) and D)

Question 15

Which one of the following statements related to swaps is correct?

Accepted Answer

A)   Brokerage firms are the dominant swap dealers in the U.S.
B)   Swaps can be custom tailored to a firm's needs.
C)   As of 2017, all swaps are traded on a single organized exchange.
D)   Swaps contracts are limited to interest rates.
E)   Swap contracts are limited to a single payment at expiration.F) B) and D)
G) A) and D)

Question 16

Which one of the following will be least helpful in offsetting a company's costs from a loss event?

Accepted Answer

A)   Self-insurance pool of cash
B)   Insurance policy exclusion
C)   Abidance with policy notification provisions
D)   Currently paid insurance premiums
E)   Low insurance deductibleF) None of the above
G) C) and D) B

Question 17

Most of the evidence to date indicates that firms with which two of the following characteristics are most apt to frequently use derivatives?

Accepted Answer

A)   Low financial distress costs and constrained access to capital markets
B)   Small in size and low financial distress costs
C)   Easy access to capital markets and high financial distress costs
D)   High financial distress costs and constrained access to capital markets
E)   High financial distress costs and easy access to capital marketsF) C) and D)
G) A) and D)

Question 18

Which one of the following can a firm do if it effectively manages its financial risks?

Accepted Answer

A)   Eliminate all of the risks faced by the firm
B)   Totally eliminate all financial risks
C)   Reduce the price volatility the firm faces
D)   Guarantee the firm's financial success
E)   Avoid all long-term financial risksF) B) and E)
G) B) and D)

Question 19

Interest rate swaps:

Accepted Answer

A)   are a group of option contracts with varying expiration dates.
B)   are rarely used by U.S. business firms.
C)   can involve exchanging one floating-rate loan for another floating-rate loan.
D)   require two firms to have access to loans with equivalent terms.
E)   are all based on the U.S. T-bill index.F) D) and E)
G) B) and C)

Question 20

Suppose a novice investor buys a call option on 45,000 barrels of oil with an exercise price of $45 per barrel and simultaneously buys a put option on 45,000 barrels of oil with the same exercise price of $45 per barrel. Her net payoff per barrel on these option contracts is ________ if the market price per barrel is $43 and ________ if the price per barrel is $47.

Accepted Answer

A)   −$2; $2
B)   −$2; $0
C)   $0; $2
D)   $2; −$2
E)   $2; $2F) C) and E)
G) A) and C)

Exam 23: Enterprise Risk Management

Which one of these statements related to forward contracts is correct?

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

Correct Answer
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Futures contracts:

Correct Answer
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When a futures call option on a commodity is exercised the option owner receives a futures contract on the commodity plus a cash payment equal to the difference between the:

Correct Answer
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Suppose that last month you purchased ten January crude oil futures contracts at a quoted price of 53.88. These contracts are based on 1,000 barrels and quoted in dollars per barrel. Assume the actual price per barrel is $56.20 in January. How much did you gain or lose by hedging your position?

Correct Answer
verified
A

In any one year, the chance that you will incur a loss of $10 million is .02 percent. Otherwise, you will have zero loss. What is your expected loss?

Correct Answer
verified

A firm with a variable-rate loan wants to protect itself solely from increases in interest rates. Which one of the following would be of most interest to this firm?

Correct Answer
verified

By definition, which one of the following contracts is marked to the market on a daily basis?

Correct Answer
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The first step in risk management is to:

Correct Answer
verified

Futures option quotes include an apostrophe. This apostrophe indicates the contracts are traded:

Correct Answer
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Suppose you sold three September cocoa futures contracts at a price quote of 1,696. Cocoa futures contracts are based on 10 metric tons and priced in dollars per ton. What will be your profit or loss on this contract if the price turns out to be $1,707 per metric ton at expiration?

Correct Answer
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B

Which type of insurance protects against the risks related to a defective manufactured product?

Correct Answer
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Assume you are looking at a payoff profile for a forward contract on oil. Which one of these statements correctly describes what you are seeing?

Correct Answer
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Correct Answer
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Which one of the following statements related to swaps is correct?

Correct Answer
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Which one of the following will be least helpful in offsetting a company's costs from a loss event?

Correct Answer
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B

Most of the evidence to date indicates that firms with which two of the following characteristics are most apt to frequently use derivatives?

Correct Answer
verified

Which one of the following can a firm do if it effectively manages its financial risks?

Correct Answer
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Interest rate swaps:

Correct Answer
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Correct Answer
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Exam 23: Enterprise Risk Management

Which one of these statements related to forward contracts is correct?

Correct AnswerverifiedShow 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

Futures contracts:

Correct AnswerverifiedShow Answer

When a futures call option on a commodity is exercised the option owner receives a futures contract on the commodity plus a cash payment equal to the difference between the:

Correct AnswerverifiedShow Answer

Suppose that last month you purchased ten January crude oil futures contracts at a quoted price of 53.88. These contracts are based on 1,000 barrels and quoted in dollars per barrel. Assume the actual price per barrel is $56.20 in January. How much did you gain or lose by hedging your position?

Correct AnswerverifiedA

In any one year, the chance that you will incur a loss of $10 million is .02 percent. Otherwise, you will have zero loss. What is your expected loss?

Correct AnswerverifiedShow Answer

A firm with a variable-rate loan wants to protect itself solely from increases in interest rates. Which one of the following would be of most interest to this firm?

Correct AnswerverifiedShow Answer

By definition, which one of the following contracts is marked to the market on a daily basis?

Correct AnswerverifiedShow Answer

The first step in risk management is to:

Correct AnswerverifiedShow Answer

Futures option quotes include an apostrophe. This apostrophe indicates the contracts are traded:

Correct AnswerverifiedShow Answer

Suppose you sold three September cocoa futures contracts at a price quote of 1,696. Cocoa futures contracts are based on 10 metric tons and priced in dollars per ton. What will be your profit or loss on this contract if the price turns out to be $1,707 per metric ton at expiration?

Correct AnswerverifiedB

Which type of insurance protects against the risks related to a defective manufactured product?

Correct AnswerverifiedShow Answer

Assume you are looking at a payoff profile for a forward contract on oil. Which one of these statements correctly describes what you are seeing?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which one of the following statements related to swaps is correct?

Correct AnswerverifiedShow Answer

Which one of the following will be least helpful in offsetting a company's costs from a loss event?

Correct AnswerverifiedB

Most of the evidence to date indicates that firms with which two of the following characteristics are most apt to frequently use derivatives?

Correct AnswerverifiedShow Answer

Which one of the following can a firm do if it effectively manages its financial risks?

Correct AnswerverifiedShow Answer

Interest rate swaps:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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A

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B

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B

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