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| 1 | |
Insurance companies have some advantages in bearing risk; these include: |
| | A) | Superior ability to estimate the probability of loss |
| | B) | Extensive experience and knowledge about how to reduce the risk of a loss |
| | C) | The ability to pool risks and thereby gain from diversification |
| | D) | All of these options |
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| 2 | |
A derivative is a financial instrument whose value is determined by: |
| | A) | A regulatory body such as the FTC |
| | B) | An underlying asset |
| | C) | Hedging a risk |
| | D) | Speculation |
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| 3 | |
Derivatives can be used either to hedge or to speculate. These actions: |
| | A) | Increase risk in both cases |
| | B) | Decrease risk in both cases |
| | C) | Spread or minimize risk in both cases |
| | D) | Offset risk by hedging and increase risk by speculating |
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| 4 | |
What questions does a risk manager need to answer? |
| | A) | What are the major risks the company is facing? |
| | B) | Is the company being paid for taking these risks? |
| | C) | How should risks be controlled? |
| | D) | All of these options |
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| 5 | |
If you sold a wheat futures contract for $3.75 per bushel and the contract ended at $3.60, how much will you net per bushel? (Ignore transaction costs.) |
| | A) | $3.75 |
| | B) | $0.15 |
| | C) | $3.60 |
| | D) | $1.15 |
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| 6 | |
On November 13, Al buys a July futures contract on 100 tons of soybean meal at a price of $172.00 a ton. On the same day, Bob sells this futures contract at the same price. On November 14, the July contract is trading at $174.2 a ton. Given that the contract is marked to market, what payments need to be made on the 14th? (Ignore transaction costs.) |
| | A) | Al pays the clearing house $220, and the clearing house pays Bob $220. |
| | B) | Bob pays the clearing house $220, and the clearing house pays Al $220. |
| | C) | Al pays the clearing house $172, and the clearing house pays Bob $174.2. |
| | D) | None; no payments are made until July. |
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| 7 | |
In January 2009, the spot price of crude oil was $41.65 a barrel and the one-year futures price was $56.38 per barrel. The interest rate was 0.44%. What was the net convenience yield? |
| | A) | 35.2% |
| | B) | 48.7% |
| | C) | −35.2% |
| | D) | 23.6% |
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| 8 | |
Having a short position in a forward means: |
| | A) | You agree to buy in the future at a price set today |
| | B) | You agree to buy in the future at a price set in the future |
| | C) | You agree to sell in the future at a price set today |
| | D) | You agree to sell in the future at a price set in the future |
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| 9 | |
Hedging risks can make sense if it: |
| | A) | Reduces the chances of financial distress |
| | B) | Motivates operations managers |
| | C) | Allows managers to concentrate on controllable business aspects |
| | D) | All of these options |
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| 10 | |
If the one-year spot interest rate is 10% and two-year spot interest rate is 12%, calculate the one-year forward interest rate one year from today (approximately): |
| | A) | 10% |
| | B) | 12% |
| | C) | 14% |
| | D) | 8% |
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| 11 | |
Friendly Bancorp has made a 5 year, $50 million loan with a fixed interest rate of 8%. Annual interest payments are $4 million. The principal will be repaid in five years. The bank wants to swap the fixed interest payment into a floating rate annuity. If the bank can borrow at 6% fixed rate for five years what is the notional principal? |
| | A) | $80 million |
| | B) | $100 million |
| | C) | $66.7 million |
| | D) | $180 million |
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| 12 | |
A chocolate company which uses the futures market to lock in the price of cocoa to protect a profit, is an example of: |
| | A) | A long hedge |
| | B) | A short hedge |
| | C) | Purchasing futures to guard against a potential loss |
| | D) | Both A and C |
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| 13 | |
With hedging, you can create a risk-free net position if: |
| | A) | The assets are positively correlated |
| | B) | The assets are perfectly correlated |
| | C) | The assets are negatively correlated |
| | D) | It is impossible to have a risk-free net position |
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| 14 | |
Delta measures the number of units of one assets that is needed to offset changes in value of the other asset. This is also known as a: |
| | A) | Short hedge |
| | B) | Long hedge |
| | C) | Hedge ratio |
| | D) | Speculation ratio |
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| 15 | |
Once a risk has been insured, the owner may be less careful to take proper precautions against damage. This is an example of: |
| | A) | Jump risk |
| | B) | Swap |
| | C) | Adverse selection |
| | D) | Moral hazard |
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