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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.


A) option
B) forward
C) futures
D) swap
E) spot

F) A) and B)
G) A) and C)

Correct Answer

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Most of the evidence to-date indicates that firms with which two of the following characteristics are most apt to frequently use derivatives? I.firms with low financial distress costs II.firms with high financial distress costs III.firms with easy access to capital markets IV.firms with constrained access to capital markets


A) I and III only
B) I and IV only
C) II and III only
D) II and IV only
E) III and IV only

F) C) and D)
G) B) and D)

Correct Answer

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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?


A) abating
B) deriving
C) hedging
D) forwarding
E) manipulating

F) A) and D)
G) All of the above

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?


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) swap

F) A) and B)
G) A) and C)

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


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 manufacturer

F) B) and E)
G) A) and E)

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Steve recently sold an option that requires him to purchase 100 shares of Omega stock at $40 a share should the option owner decide to exercise the option.What type of option contract did Steve sell?


A) futures option
B) call option
C) put option
D) straddle
E) strangle

F) C) and D)
G) None of the above

Correct Answer

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Murray's can borrow money at a fixed rate of 10.5 percent or a variable rate set at prime plus 2.25 percent.Fred's can borrow money at a variable rate of prime plus 1.5 percent or a fixed rate of 12 percent.Murray's prefers a variable rate and Fred's prefers a fixed rate.Given this information,which one of the following statements is correct?


A) After swapping interest rates with Fred's, Murray's may be able to pay prime plus 2 percent.
B) Both companies can profit in a swap which will allow Murray's to pay a variable rate of prime plus one percent.
C) Fred's will end up with a fixed rate of 10 percent.
D) Fred's has the best chance of profiting if it does an interest rate swap with Murray's.
E) There are no terms under which Murray's and Fred's can swap interest rates.

F) C) and D)
G) None of the above

Correct Answer

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If a firm creates an interest rate collar on a variable rate loan,then the rate the firm pays will always:


A) remain constant at the average of the floor and cap rates.
B) remain constant at the floor rate.
C) remain constant at the cap rate.
D) be higher than, or equal to, the cap but lower than, or equal to, the floor.
E) be higher than, or equal to, the floor but lower than, or equal to, the cap.

F) None of the above
G) A) and E)

Correct Answer

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How much will you pay per pound for a September 130 orange juice futures call option? Orange juice - 15,000 lbs: U.S.cents per lb. How much will you pay per pound for a September 130 orange juice futures call option? Orange juice - 15,000 lbs: U.S.cents per lb. A) $0.0055 B) $0.0065 C) $0.0550 D) $0.0650 E) $0.1135


A) $0.0055
B) $0.0065
C) $0.0550
D) $0.0650
E) $0.1135

F) A) and B)
G) B) and E)

Correct Answer

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C

You are the purchasing agent for a major cookie company.You anticipate that your firm will need 20,000 bushels of oats in December.You decide to hedge your position today and did so at the closing price of the day.Assume that the actual market price turns out to be 228.0 on the day you actually buy the oats.How much did you gain or lose by hedging your position? Oats - 5,000 bu.: Cents per bu. You are the purchasing agent for a major cookie company.You anticipate that your firm will need 20,000 bushels of oats in December.You decide to hedge your position today and did so at the closing price of the day.Assume that the actual market price turns out to be 228.0 on the day you actually buy the oats.How much did you gain or lose by hedging your position? Oats - 5,000 bu.: Cents per bu. A) lost $4,000 B) lost $400 C) saved $40 D) saved $400 E) saved $4,000


A) lost $4,000
B) lost $400
C) saved $40
D) saved $400
E) saved $4,000

F) A) and C)
G) A) and E)

Correct Answer

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Which two of the following are key differences between an option contract and a forward contract? I.option contracts can be resold but forward contracts cannot II.the option price is determined at settlement while the forward price is determined when the contract is initiated III.the rights and obligations of the buyer IV.cost when contract initiated


A) I and III only
B) II and IV only
C) III and IV only
D) I and II only
E) II and III only

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

Correct Answer

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Farmer Mac owns a large orange grove in Florida.The value of his business is directly related to the price of oranges.Which one of the following is a graphical representation of this price-value relationship?


A) exchange line
B) net present value profile
C) risk profile
D) market line
E) return grid

F) B) and D)
G) None of the above

Correct Answer

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C

A payoff profile:


A) determines the price of an option contract.
B) determines whether a forward or a futures contract is needed.
C) applies only to contract sellers.
D) determines the price of a collar.
E) illustrates potential gains and losses.

F) B) and C)
G) B) and E)

Correct Answer

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What is cross-hedging? Why do you suppose firms use this method of risk management? What are some of the drawbacks?

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Cross-hedging is hedging an asset with c...

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A bakery generally enters into a forward contract in wheat as a:


A) hedger.
B) speculator.
C) spot trader.
D) broker.
E) spectator.

F) None of the above
G) B) and D)

Correct Answer

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A

Suppose your firm produces breakfast cereal and needs 65,000 bushels of corn in December for an upcoming promotion.You would like to lock in your costs today because you are concerned that corn prices might go up between now and December.To hedge your risk exposure,you could purchase corn futures contracts today effectively locking in a total settlement price of _____,based on the closing price shown in the table below. Futures: Corn - 5,000 bu.,U.S.cents per bu. Suppose your firm produces breakfast cereal and needs 65,000 bushels of corn in December for an upcoming promotion.You would like to lock in your costs today because you are concerned that corn prices might go up between now and December.To hedge your risk exposure,you could purchase corn futures contracts today effectively locking in a total settlement price of _____,based on the closing price shown in the table below. Futures: Corn - 5,000 bu.,U.S.cents per bu. A) $163,800 B) $164,125 C) $174,238 D) $179,400 E) $183,463


A) $163,800
B) $164,125
C) $174,238
D) $179,400
E) $183,463

F) A) and B)
G) A) and C)

Correct Answer

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


A) American call
B) American put
C) European call
D) European put
E) European swap

F) B) and E)
G) C) and E)

Correct Answer

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Suppose you purchase the November call option on orange juice futures with a strike price of 150 at the price shown in the table below.What will be your profit or loss on this contract if the price of orange juice futures is $0.616 per pound at expiration of the option contract? Futures Options Orange juice: 15,000 lbs,U.S.cents per lb. Suppose you purchase the November call option on orange juice futures with a strike price of 150 at the price shown in the table below.What will be your profit or loss on this contract if the price of orange juice futures is $0.616 per pound at expiration of the option contract? Futures Options Orange juice: 15,000 lbs,U.S.cents per lb. A) loss of $2,107.50 B) loss of $1,717.50 C) no profit or loss D) profit of $1,717.50 E) profit of $2,107.50


A) loss of $2,107.50
B) loss of $1,717.50
C) no profit or loss
D) profit of $1,717.50
E) profit of $2,107.50

F) A) and E)
G) C) and E)

Correct Answer

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You believe the price of a stock is going to decline within the next three months.Which one of the following option payoff profiles will reflect a profit if your belief is correct?


A) buying a call
B) selling a call
C) buying a put
D) selling a put

E) B) and C)
F) B) and D)

Correct Answer

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


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 should be responsible for hedging its own short-run financial risk.
D) Short-run financial risk is defined as temporary price changes which result directly from natural disasters, such as tornadoes, droughts, and floods.
E) Thus far, hedging techniques have been unsuccessful in reducing short-run financial risk.

F) B) and E)
G) B) and D)

Correct Answer

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