Chapter 24 Test bank – Static Key
1.
The majority of large companies use derivatives in some way to manage their risk.
2.
Insurance is often an effective way to reduce risk when the insurance company can spread its risk over many different
policies.
3.
A swap is an arrangement by two counterparties to exchange one stream of cash flows for another.
4.
A company that hedges simply passes the risk on to someone else.
5.
Unless the corporation has reason to believe that the odds are stacked in its favor, it should use derivatives for speculation,
not for hedging.
6.
Futures contracts are custom-tailored forward contracts.
7.
Properly managed, hedging can be a very profitable activity.
8.
Firms use options to speculate not to reduce risk.
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.
A commodity producer can place a floor on its revenues by selling put options on the commodity.
13.
A producer that uses options to reduce downside risk is buying a “protective put.”
14.
A commodity producer that uses put options to reduce the risk of a fall in commodity prices is effectively buying insurance.
15.
An oil producer would sell, rather than buy, crude oil futures to protect against falling oil prices.
16.
Futures contracts are standardized to expire on the same day each year.
17.
Buyers of financial futures place an order to buy a financial asset at a future date.
18.
Speculators are a necessary component of well-functioning futures markets.
19.
Forward contracts are marked to market.
20.
In a typical interest rate swap the two parties will exchange a series of fixed payments for a series of payments that are linked
to the level of interest rates.
21.
Hedging may increase a company’s debt capacity.
22.
By using options a firm can (at a cost) 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.
Investors can hedge against a change in house prices by purchasing real estate futures contracts.
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 margin.
28.
A farmer can avoid delivery on a futures contract by buying an offsetting futures contract.
29.
Companies should always leave investors to hedge for themselves.
30.
The derivatives market is characterized by:
31.
A bond investor who is worried about future fluctuations in interest rates could:
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 an asset that cannot be delivered?
34.
How might a firm such as General Mills protect itself against fluctuations in raw material prices for breakfast cereals?
35.
The buyer of a credit default swap:
36.
What form of insurance 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 someone who wishes to:
39.
A speculator who buys a futures contract is betting that prices will _____ by the expiration of the contract.
40.
A speculator who sells a futures contract is betting that prices will _____ by the expiration of the contract.
41.
What happens to the price of a futures contract as expiration draws closer?
42.
When a commodity futures reaches its expiration, the seller usually:
43.
A commodity producer who is worried about future prices can best hedge by:
44.
A farmer 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 milling company buys a futures contract that requires it 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 miller:
46.
A milling company buys a futures contract that requires it to take delivery of 5,000 bushels of wheat at a price of $6.75 per
bushel. Next day the price of the future is $6.80. The miller:
47.
Yesterday you sold six-month futures on the S&P index at a price of 2,100. Today the index closed at 2,050 and the future at
2,140. You get a call from your broker. Is he:
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:
50.
The process of marking a futures contract to market means that:
51.
A futures contract calls for delivery of 60,000 pounds of soybean oil. What happens to the seller of a soybean oil futures
contract at 41 cents per pound if the futures price closes the next day at 42 cents per pound?
52.
A futures contract seller is obligated to deliver 5,000 bushels of soybeans for $12.00 per bushel at expiration. If soybean
futures close at $12.10 the next day, the seller:
53.
What has happened to cause a $250 loss to be marked to the margin account of a futures contract buyer?
54.
The effect of marking a futures contract to market is similar to:
55.
The primary purpose of financial futures is to:
56.
The basic difference between speculators and hedgers in futures contracts is that speculators:
57.
If there is an excess of market participants who want to buy the futures as a hedge, then:
58.
Which one of the following is not correct concerning forward contracts? Forward contracts:
59.
You enter into a forward contract to take delivery of 1 million euros 3 months from now. What happens to the price you will
pay at expiration if the euro depreciates during the contract period?
60.
Which one of the following is a reason for firms to engage in currency swaps?