Question 1

Which of the following is NOT an example of a derivative security?

Accepted Answer

A)  Futures.
B)  Options.
C)  Swaps.
D)  Forward contracts.
E)  Preferred stock.F) A) and D)
G) C) and D)

Question 2

A swap is a method used to reduce financial risk.Which of the following statements about swaps,if any,is NOT CORRECT?

Accepted Answer

A)  A swap involves the exchange of cash payment obligations.
B)  The earliest swaps were currency swaps, in which companies traded debt denominated in different currencies, say dollars and pounds.
C)  Swaps are very often arranged by a financial intermediary, who may or may not take the position of one of the counterparties.
D)  A problem with swaps is that no standardized contracts exist, which has prevented the development of a secondary market.
E)  Swaps can involve side payments in order to get the counterparty to agree to the swap.F) D) and E)
G) A) and B)

Question 3

An investor who "writes" a call option without the stock in his or her portfolio to back it up is selling a(n)

Accepted Answer

A)  Call option.
B)  Put option.
C)  Out-of-the-money option.
D)  Naked option.
E)  Covered option.F) C) and E)
G) B) and C)

Question 4

Interest rate swaps allow a firm to exchange fixed for floating-rate payments,but a swap cannot reduce actual net interest expenses.

Accepted Answer

A) True 
 B)False

Question 5

An option that gives the holder the right to sell a stock at a specified price at some time in the future is called a(n)

Accepted Answer

A)  Call option.
B)  Put option.
C)  Out-of-the-money option.
D)  Naked option.
E)  Covered option.F) A) and D)
G) A) and E)

Question 6

Which of the following statements is most CORRECT?

Accepted Answer

A)  One advantage of forward contracts is that they are default free.
B)  Futures contracts generally trade on an organized exchange and are marked to market daily.
C)  Goods are never delivered under forward contracts, but are almost always delivered under futures contracts.
D)  Forward contracts are generally standardized instruments, whereas futures contracts are generally tailor-made for the 2 parties of the contract.
E)  Essentially there are no differences between forward and futures contracts, except that forward contracts are used only for financial assets while futures contracts are used only for commodities.F) None of the above
G) A) and E)

Question 7

Which of the following is NOT a way risk management can be used to increase the value of a firm?

Accepted Answer

A)  Risk management can increase debt capacity.
B)  Risk management can help a firm maintain its optimal capital budget.
C)  Risk management can reduce the expected costs of financial distress.
D)  Risk management can help firms minimize taxes.
E)  Risk management can allow managers to defer receipt of their bonuses and thus postpone tax payments.F) C) and D)
G) A) and B)

Question 8

A 6-month call option on Meyers Inc.'s stock has a strike price of $45 and sells in the market for $8.25.Meyers' current stock price is $48.What is the option premium?

Accepted Answer

A)  $4.25
B)  $4.73
C)  $5.25
D)  $5.78
E)  $6.35F) A) and B)
G) B) and C) C

Question 9

Deeble Construction Co.'s stock is trading at $30 a share.There are also call options on the company's stock,some with an exercise price of $25 and some with an exercise price of $35.All options expire in 3 months.Which of the following best describes the value of these options?

Accepted Answer

A)  If Deeble's stock price rose by $5, the exercise value of the options with the $25 exercise price would also increase by $5.
B)  The options with the $25 exercise price will sell for less than the options with the $35 exercise price.
C)  The options with the $25 exercise price have an exercise value greater than $5.
D)  The options with the $35 exercise price have an exercise value greater than $0.
E)  The options with the $25 exercise price will sell for $5.F) A) and B)
G) A) and C)

Question 10

The value of a stock option depends on all of the following EXCEPT:

Accepted Answer

A)  Exercise price.
B)  Variability of the stock price.
C)  Length of time until option expiration.
D)  Risk-free rate of interest.
E)  Bond price.F) All of the above
G) D) and E)

Question 11

Suppose a CBOT 10-year U.S.Treasury note futures contract has a quoted price of 88-30.If annual interest rates go down by 1.00 percentage point,what is the gain or loss on the futures contract? (Assume a $1,000 par value,round the new interest rate to 4 decimal places when written as a decimal,and round the change in price up to the nearest whole dollar.)

Accepted Answer

A)  $63.00
B)  $65.00
C)  $67.00
D)  $69.00
E)  $71.00F) A) and E)
G) All of the above

Question 12

There are call options on the common stock of XYZ Corporation.Which of the following best describes the factors that affect call option values?

Accepted Answer

A)  The price of call options will rise if XYZ's stock price rises.
B)  The higher the strike price, the higher the call option price.
C)  Assuming the same strike price, a call option that expires in 1 month will sell for a higher price than one that expires in 3 months.
D)  The less volatile a stock's price, the more valuable a call option on the stock is.
E)  If the risk-free rate of interest increases, the value of call options will decrease.F) D) and E)
G) C) and E) A

Question 13

Suppose a CBOT 10-year U.S.Treasury note futures contract has a quoted price of 89-09.What is the implied annual interest rate inherent in this futures contract?

Accepted Answer

A)  6.81%
B)  7.17%
C)  7.55%
D)  7.92%
E)  8.32%F) None of the above
G) All of the above

Question 14

A call option whose underlying stock value is less than the corresponding exercise price is an example of a(n)

Accepted Answer

A)  Straddle option.
B)  Put option.
C)  Out-of-the-money option.
D)  Naked option.
E)  Covered option.F) C) and D)
G) A) and E)

Question 15

The two basic types of hedges involving the futures market are long hedges and short hedges,where the words "long" and "short" refer to the maturity of the hedging instrument.For example,a long hedge might use Treasury bonds,while a short hedge might use 3-month T-bills.

Accepted Answer

A) True 
 B)False  False

Question 16

Speculative risks are symmetrical in the sense that they offer the chance of a gain as well as a loss,while pure risks are those that can only lead to losses.

Accepted Answer

A) True 
 B)False

Question 17

A 6-month call option on Romer Technologies' stock has a strike price of $45 and sells in the market for $8.25.Romer's current stock price is $48.What is the exercise value of the option?

Accepted Answer

A)  $3.00
B)  $3.75
C)  $4.69
D)  $5.86
E)  $7.32F) B) and E)
G) A) and C)

Question 18

Which of the following events is likely to decrease the value of call options on the common stock of GCC Company?

Accepted Answer

A)  An increase in GCC's stock price.
B)  An increase in the exercise price of the option.
C)  An increase in the amount of time until the option expires.
D)  An increase in the risk-free rate.
E)  GCC's stock price becomes more risky (higher variance) .F) A) and D)
G) A) and E)

Question 19

An investor who "writes" a call option against stock held in his or her portfolio is selling a(n)

Accepted Answer

A)  Straddle option.
B)  Put option.
C)  Out-of-the-money option.
D)  Naked option.
E)  Covered option.F) A) and B)
G) A) and C)

Question 20

Suppose a CBOT 10-year U.S.Treasury note futures contract has a quoted price of 103-18.If annual interest rates go up by 1.00 percentage point,what is the gain or loss on the futures contract? (Assume a $1,000 par value,round the new interest rate to 4 decimal places when written as a decimal,and round the change in price up to the nearest whole dollar.)

Accepted Answer

A)  −$61.00
B)  −$64.00
C)  −$67.00
D)  −$71.00
E)  −$75.00F) A) and B)
G) B) and D)

Exam 18: Derivatives and Risk Management

Which of the following is NOT an example of a derivative security?

Correct Answer
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A swap is a method used to reduce financial risk.Which of the following statements about swaps,if any,is NOT CORRECT?

Correct Answer
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An investor who "writes" a call option without the stock in his or her portfolio to back it up is selling a(n)

Correct Answer
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Interest rate swaps allow a firm to exchange fixed for floating-rate payments,but a swap cannot reduce actual net interest expenses.

Correct Answer
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An option that gives the holder the right to sell a stock at a specified price at some time in the future is called a(n)

Correct Answer
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Which of the following statements is most CORRECT?

Correct Answer
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Which of the following is NOT a way risk management can be used to increase the value of a firm?

Correct Answer
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A 6-month call option on Meyers Inc.'s stock has a strike price of $45 and sells in the market for $8.25.Meyers' current stock price is $48.What is the option premium?

Correct Answer
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C

Deeble Construction Co.'s stock is trading at $30 a share.There are also call options on the company's stock,some with an exercise price of $25 and some with an exercise price of $35.All options expire in 3 months.Which of the following best describes the value of these options?

Correct Answer
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The value of a stock option depends on all of the following EXCEPT:

Correct Answer
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Correct Answer
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There are call options on the common stock of XYZ Corporation.Which of the following best describes the factors that affect call option values?

Correct Answer
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A

Suppose a CBOT 10-year U.S.Treasury note futures contract has a quoted price of 89-09.What is the implied annual interest rate inherent in this futures contract?

Correct Answer
verified

A call option whose underlying stock value is less than the corresponding exercise price is an example of a(n)

Correct Answer
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The two basic types of hedges involving the futures market are long hedges and short hedges,where the words "long" and "short" refer to the maturity of the hedging instrument.For example,a long hedge might use Treasury bonds,while a short hedge might use 3-month T-bills.

Correct Answer
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False

Speculative risks are symmetrical in the sense that they offer the chance of a gain as well as a loss,while pure risks are those that can only lead to losses.

Correct Answer
verified

A 6-month call option on Romer Technologies' stock has a strike price of $45 and sells in the market for $8.25.Romer's current stock price is $48.What is the exercise value of the option?

Correct Answer
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Which of the following events is likely to decrease the value of call options on the common stock of GCC Company?

Correct Answer
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An investor who "writes" a call option against stock held in his or her portfolio is selling a(n)

Correct Answer
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Correct Answer
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Exam 18: Derivatives and Risk Management

Which of the following is NOT an example of a derivative security?

Correct AnswerverifiedShow Answer

A swap is a method used to reduce financial risk.Which of the following statements about swaps,if any,is NOT CORRECT?

Correct AnswerverifiedShow Answer

An investor who "writes" a call option without the stock in his or her portfolio to back it up is selling a(n)

Correct AnswerverifiedShow Answer

Interest rate swaps allow a firm to exchange fixed for floating-rate payments,but a swap cannot reduce actual net interest expenses.

Correct AnswerverifiedShow Answer

An option that gives the holder the right to sell a stock at a specified price at some time in the future is called a(n)

Correct AnswerverifiedShow Answer

Which of the following statements is most CORRECT?

Correct AnswerverifiedShow Answer

Which of the following is NOT a way risk management can be used to increase the value of a firm?

Correct AnswerverifiedShow Answer

A 6-month call option on Meyers Inc.'s stock has a strike price of $45 and sells in the market for $8.25.Meyers' current stock price is $48.What is the option premium?

Correct AnswerverifiedC

Deeble Construction Co.'s stock is trading at $30 a share.There are also call options on the company's stock,some with an exercise price of $25 and some with an exercise price of $35.All options expire in 3 months.Which of the following best describes the value of these options?

Correct AnswerverifiedShow Answer

The value of a stock option depends on all of the following EXCEPT:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

There are call options on the common stock of XYZ Corporation.Which of the following best describes the factors that affect call option values?

Correct AnswerverifiedA

Suppose a CBOT 10-year U.S.Treasury note futures contract has a quoted price of 89-09.What is the implied annual interest rate inherent in this futures contract?

Correct AnswerverifiedShow Answer

A call option whose underlying stock value is less than the corresponding exercise price is an example of a(n)

Correct AnswerverifiedShow Answer

The two basic types of hedges involving the futures market are long hedges and short hedges,where the words "long" and "short" refer to the maturity of the hedging instrument.For example,a long hedge might use Treasury bonds,while a short hedge might use 3-month T-bills.

Correct AnswerverifiedFalse

Speculative risks are symmetrical in the sense that they offer the chance of a gain as well as a loss,while pure risks are those that can only lead to losses.

Correct AnswerverifiedShow Answer

A 6-month call option on Romer Technologies' stock has a strike price of $45 and sells in the market for $8.25.Romer's current stock price is $48.What is the exercise value of the option?

Correct AnswerverifiedShow Answer

Which of the following events is likely to decrease the value of call options on the common stock of GCC Company?

Correct AnswerverifiedShow Answer

An investor who "writes" a call option against stock held in his or her portfolio is selling a(n)

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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C

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A

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False

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