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1. A survey of the world's 500 largest companies found that the vast majority of the
companies use derivatives in some way to manage their risk.
2. Purchasing an insurance policy is one means of reducing risk.
3. A swap is the arrangement by two counterparties to exchange one stream of cash flows
for another.
4. Speculation is foolish unless you have reason to believe that the odds are stacked in your
favor.
5. If you are not better informed than the highly paid professionals in banks and other
institutions, you should use derivatives for speculation, not for hedging.
6. Futures contracts are custom-tailored forward contracts.
7. Hedging reduces risks and also adds profit to a firm.
8. While private individuals and firms can hedge risks using options, governments are
forbidden from doing so.
9. Mexico purchased call options to lock in the price of its oil and create a base floor for its
revenue stream.
10. A firm might enter a swap contract whereby it agrees to make a series of regular payments
in one currency in return for receiving a series of payments in another currency.
11. Swap contracts can be based on either interest rates or currencies.
12. It is impossible for a producer who sells put options to lose more than the price of the
option premium.
13. It is impossible for a producer who sells put options to lose more than the exercise price
agreed upon in the option contract.
14. Put options can be thought of as insurance policies for commodity producers.
15. An oil producer would sell, rather than buy, crude oil futures for protection from falling
prices.
16. Futures contracts are standardized to expire on the same day each year.
17. Financial futures contracts are available through the Chicago Board of Trade and the
Chicago Mercantile Exchange.
18. Speculators are a necessary component of well-functioning futures markets.
19. Forward contracts are marked to market.
20. Counterparties to an interest rate swap exchange both interest payments and principal
amounts.
21. A number of copper producers have found that hedging increases their debt capacity.
22. By using options a firm can protect against increases in raw material prices, while
continuing to benefit from price decreases.
23. Unlike options, the purchase of a futures contract is a binding obligation to purchase at a
fixed price at contract maturity.
24. The profit to the buyer of a futures contract is equal to the initial futures price minus the
ultimate market price.
25. If you live in certain cities, you can hedge against a change in the price of your home by
purchasing a real estate futures contract on the Chicago Mercantile Exchange.
26. Exchange traded futures contracts allow the seller to choose the place of delivery for the
commodity.
27. Both the seller and the buyer in a futures contract are required to put up margins.
28. A farmer can avoid delivery on a futures contract by buying an offsetting futures contract.
29. All companies work hard to hedge their exposure to price fluctuations.
30. The derivatives market is characterized by:
31. Which one of the following is a source of profit for a swap dealer?
32. Which one of the following is
not
generally considered a benefit of hedging?
33. Which one of the following futures contracts is written on a nondeliverable asset?
34. How might a firm such as General Mills use options to control raw material prices for
breakfast cereals?
35. Which one of these firms would probably be most interested in a credit default swap?
36. What form of hedging would you suggest for a producer that wishes to be protected from
future price decreases but wants to benefit from any future price increases?
37. Which one of the following is
not
correct concerning futures contracts?
38. Selling a futures contract may be appropriate for one who wishes to:
39. A hedger who buys a futures contract is betting that prices will _____ at the expiration of
the contract.
40. A farmer who sells a futures contract is betting that prices will _____ at the expiration of
the contract.
41. What happens to the price of a futures contract as expiration draws closer?
42. The customary delivery procedure at the expiration of a commodity futures contract is:
43. A producer that is worried about the future price that will be available when its product is
to be sold can best hedge this price risk by:
44. A farmer stores his fall harvest of corn and sells corn futures for March delivery at $7.50
per bushel. In March the spot price of corn is $7.20 per bushel. Which of the following is correct?
45. A hedger buys a futures contract that obligates the owner to take delivery of 5,000
bushels of wheat at a price of $6.80 per bushel. At expiration the spot price of wheat is $6.68 per
bushel. The hedger has:
46. A hedger buys a futures contract that obligates the owner to take delivery of 5,000
bushels of wheat at a price of $6.75 per bushel. At expiration the spot price of wheat is $6.80 per
bushel. The hedger has:
47. What must happen to prices over the course of a contract for the seller of a futures
contract to maximize the benefits of the hedge?
48. Which one of the following would
not
be regulated in a standardized futures contract?
49. The purpose of a margin account for a futures contract is to:
