Question 1

If you have a _____ rate loan and you felt that interest rates are going to _____, you should consider purchasing an interest rate collar.

Accepted Answer

A)   ﬁxed; rise
B)   ﬁxed; fall
C)   variable; rise
D)   variable; fall
E)   variable; change but you don't know the direction of the changeF) A) and B)
G) D) and E)

Question 2

Assume you purchased one October futures contract at the lifetime low and sold the contract at the lifetime high. How much proﬁt would you have?

Accepted Answer

A)   $500
B)   $620
C)   $2,850
D)   $9,250
E)   $9,650F) A) and B)
G) A) and C)

Question 3

You are a jewelry maker. Every September you purchase 15,000 troy ounces of silver. Today, you hedged your position at what turned out to be the highest price for the day. Assume that the actual
Price per troy ounce of silver is 10.361 at the time you make the purchase in September. You would
Have _____ if you had not hedged your position.
Silver - 5,000 troy oz.; $ per troy oz.

Accepted Answer

A)   saved $2,250
B)   saved $2,880
C)   spent another $450
D)   spent another $2,250
E)   spent another $2,880F) B) and E)
G) A) and E)

Question 4

Provide a graphical representation of buying a put option.

Accepted Answer

The answer of Provide a graphical representation of buying a...

Question 5

You purchased three September futures contracts on silver when the price quote was 10.472. Given today's prices as shown in the table, you have a total proﬁt (loss)  to date of:
Silver - 5,000 troy oz.; $ per troy oz.

Accepted Answer

A)   -$855.
B)   -$585.
C)   $585.
D)   $675.
E)   $855.F) B) and E)
G) B) and D)

Question 6

Your ﬁrm currently has all ﬁxed-rate debt. You would like to convert part of this to ﬂoating-rate debt. You should consider a(n) :

Accepted Answer

A)   Option on ﬂoating-rate bonds.
B)   Forward contract on Treasury bills.
C)   Interest rate swap.
D)   Currency swap.
E)   Interest rate call option.F) C) and E)
G) C) and D)

Question 7

Gains and losses on futures contracts are realized:

Accepted Answer

A)   Only on the settlement day.
B)   If the contract is exercised, otherwise, they are never realized.
C)   Only if the buyer ﬁnds it proﬁtability to exercise the contract.
D)   On a daily basis through a process known as marking-to-market.
E)   Only at the time the contracts mature.F) D) and E)
G) None of the above

Question 8

A ﬁrm with a variable-rate loan can purchase an interest rate _____ to protect itself from increases in interest rates.

Accepted Answer

A)   Floor.
B)   Wall.
C)   Cap.
D)   Hat.
E)   Cloak.F) All of the above
G) A) and E)

Question 9

Explain how an airline that has an ongoing need for jet fuel might use futures to hedge. What would
the airline hope to gain?

Accepted Answer

The airline needs to acquire fuel, so it...

Question 10

S&P 500 INDEX (CME) ; $500 times index May 12, 2007  Suppose that yesterday you purchased one December futures contract at the settle price. At the close of business today, how much is your contract worth? (Ignore margin considerations.)

Accepted Answer

A)   $5,875 less than yesterday
B)   $11.7 less than yesterday
C)   $11.7 more than yesterday
D)   $5,850 more than yesterday
E)   $5,875 more than yesterdayF) A) and E)
G) A) and D)

Question 11

A swap contract is deﬁned as an agreement between two parties to exchange:

Accepted Answer

A)   Speciﬁed cash ﬂows at speciﬁed intervals in the future.
B)   A predetermined quantity of a ﬁnancial asset at a predetermined price on a speciﬁed date.
C)   An agreed upon amount of a ﬁnancial asset for cash at a speciﬁed rate on a speciﬁed date.
D)   Goods on a future speciﬁed date with the quantity and price determined today.
E)   Financial assets, at the option of the buyer, on a speciﬁed date at the price determined today.F) All of the above
G) B) and E)

Question 12

A payoff proﬁle is a plot showing how price changes affect the:

Accepted Answer

A)   Total present value of a ﬁrm.
B)   Time at which an option should be exercised.
C)   Future value of a ﬁrm.
D)   Risk level associated with a contract.
E)   Gains and losses on a contract.F) None of the above
G) A) and C)

Question 13

The payment of a premium when the contract is entered represent a difference between an option
contract and a forward contract.

Accepted Answer

A) True 
 B)False

Question 14

You expect to deliver 60,000 bushels of wheat to the market in September. Today, you hedge your position by selling futures contracts on half of your expected delivery at the ﬁnal price of the day.
Assume that the market price turns out to be 495´5 at the time you make your delivery in
September. How much more or less would you have earned if you had not bought the futures
Contracts?
Wheat - 5,000 bu.: cents per bu.

Accepted Answer

A)   $24,000 less
B)   $2,400 less
C)   $0 more or less
D)   $2,400 more
E)   $24,000 moreF) A) and C)
G) C) and E)

Question 15

Interest rate swaps can be used to change the index which determines the variable rate on a ﬁrm's
debt.

Accepted Answer

A) True 
 B)False

Question 16

Which one of the following statements concerning option payoffs is correct?

Accepted Answer

A)   The buyer of a call proﬁts when the exercise price exceeds the market price.
B)   The buyer of a call proﬁts when the strike price exceeds the exercise price.
C)   A put will only be exercised if both the seller and the buyer can proﬁt.
D)   Both the buyer and the seller proﬁt when a call is exercised.
E)   The seller of a put incurs a loss when a put is exercised.F) B) and D)
G) A) and E)

Question 17

You think that market interest rates are going to fall. In order to make money (or to reduce losses) , you could _______________.

Accepted Answer

A)   Buy a put option on Treasury bonds.
B)   Sell a put option on Treasury bonds.
C)   Buy an interest rate cap.
D)   Sell a Treasury bond futures contract.
E)   Sell a call option on Treasury bonds.F) C) and D)
G) None of the above

Question 18

How much will you pay per pound for a September 170 orange juice futures call option? Orange juice - 15,000 lbs: cents per lb.

Accepted Answer

A)   $0.0245
B)   $0.0350
C)   $0.245
D)   $0.350
E)   $2.450F) B) and D)
G) A) and D)

Question 19

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

Accepted Answer

A)   citrus grower with another citrus grower
B)   oil producer with another oil producer
C)   clothing manufacturer with a cotton farmer
D)   cereal maker with a cotton farmer
E)   a shirt manufacturer with a pants manufacturerF) All of the above
G) A) and B)

Question 20

Your ﬁrm currently has all ﬁxed-rate debt. You would like to convert part of this to ﬂoating-rate debt. You should consider a(n) :

Accepted Answer

A)   Option on ﬂoating-rate bonds.
B)   Forward contract on U.S. Treasury bills.
C)   Interest rate swap.
D)   Currency swap.
E)   Interest rate call option.F) A) and E)
G) None of the above

Exam 24: Options and Corporate Finance

Gains and losses on futures contracts are realized:

Correct Answer
verified

A swap contract is deﬁned as an agreement between two parties to exchange:

Correct Answer
verified

The payment of a premium when the contract is entered represent a difference between an option contract and a forward contract.

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified

Interest rate swaps can be used to change the index which determines the variable rate on a ﬁrm's debt.

Correct Answer
verified

How much will you pay per pound for a September 170 orange juice futures call option? Orange juice - 15,000 lbs: cents per lb.

Correct Answer
verified

Correct Answer
verified

Your ﬁrm currently has all ﬁxed-rate debt. You would like to convert part of this to ﬂoating-rate debt. You should consider a(n) :

Correct Answer
verified

You purchased three September futures contracts on silver when the price quote was 10.472. Given today's prices as shown in the table, you have a total proﬁt (loss) to date of: Silver - 5,000 troy oz.; $ per troy oz.

Correct Answer
verified

Provide a graphical representation of buying a put option.

Correct Answer
verified

A payoff proﬁle is a plot showing how price changes affect the:

Correct Answer
verified

Your ﬁrm currently has all ﬁxed-rate debt. You would like to convert part of this to ﬂoating-rate debt. You should consider a(n) :

Correct Answer
verified

If you have a _ rate loan and you felt that interest rates are going to _, you should consider purchasing an interest rate collar.

Correct Answer
verified

Explain how an airline that has an ongoing need for jet fuel might use futures to hedge. What would the airline hope to gain?

Correct Answer
verified
The airline needs to acquire fuel, so it...
View Answer

A ﬁrm with a variable-rate loan can purchase an interest rate _____ to protect itself from increases in interest rates.

Correct Answer
verified

Which one of the following statements concerning option payoffs is correct?

Correct Answer
verified

Assume you purchased one October futures contract at the lifetime low and sold the contract at the lifetime high. How much proﬁt would you have?

Correct Answer
verified

S&P 500 INDEX (CME) ; $500 times index May 12, 2007 Suppose that yesterday you purchased one December futures contract at the settle price. At the close of business today, how much is your contract worth? (Ignore margin considerations.)

Correct Answer
verified

You think that market interest rates are going to fall. In order to make money (or to reduce losses) , you could _______________.

Correct Answer
verified

Exam 24: Options and Corporate Finance

Gains and losses on futures contracts are realized:

Correct AnswerverifiedShow Answer

A swap contract is deﬁned as an agreement between two parties to exchange:

Correct AnswerverifiedShow Answer

The payment of a premium when the contract is entered represent a difference between an option contract and a forward contract.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Interest rate swaps can be used to change the index which determines the variable rate on a ﬁrm's debt.

Correct AnswerverifiedShow Answer

How much will you pay per pound for a September 170 orange juice futures call option? Orange juice - 15,000 lbs: cents per lb.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Your ﬁrm currently has all ﬁxed-rate debt. You would like to convert part of this to ﬂoating-rate debt. You should consider a(n) :

Correct AnswerverifiedShow Answer

You purchased three September futures contracts on silver when the price quote was 10.472. Given today's prices as shown in the table, you have a total proﬁt (loss) to date of: Silver - 5,000 troy oz.; $ per troy oz.

Correct AnswerverifiedShow Answer

Provide a graphical representation of buying a put option.

Correct AnswerverifiedShow Answer

A payoff proﬁle is a plot showing how price changes affect the:

Correct AnswerverifiedShow Answer

Your ﬁrm currently has all ﬁxed-rate debt. You would like to convert part of this to ﬂoating-rate debt. You should consider a(n) :

Correct AnswerverifiedShow Answer

If you have a _____ rate loan and you felt that interest rates are going to _____, you should consider purchasing an interest rate collar.

Correct AnswerverifiedShow Answer

Explain how an airline that has an ongoing need for jet fuel might use futures to hedge. What would the airline hope to gain?

Correct AnswerverifiedThe airline needs to acquire fuel, so it...View AnswerShow Answer

A ﬁrm with a variable-rate loan can purchase an interest rate _____ to protect itself from increases in interest rates.

Correct AnswerverifiedShow Answer

Which one of the following statements concerning option payoffs is correct?

Correct AnswerverifiedShow Answer

Assume you purchased one October futures contract at the lifetime low and sold the contract at the lifetime high. How much proﬁt would you have?

Correct AnswerverifiedShow Answer

S&P 500 INDEX (CME) ; $500 times index May 12, 2007 Suppose that yesterday you purchased one December futures contract at the settle price. At the close of business today, how much is your contract worth? (Ignore margin considerations.)

Correct AnswerverifiedShow Answer

You think that market interest rates are going to fall. In order to make money (or to reduce losses) , you could _______________.

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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If you have a _ rate loan and you felt that interest rates are going to _, you should consider purchasing an interest rate collar.

Correct Answer
verified

Correct Answer
verified
The airline needs to acquire fuel, so it...
View Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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