1. A futures contract differs from a forward contract in that
Multiple choice question.
forward contracts are publicly traded.
incorrect
Reason:
Futures contracts are publicly traded, not forward contracts.
futures contracts do not have a predetermined settlement date.
forward contract values can be tied to commodity prices.
Reason:
This is not a difference - it is true for both.
forward contracts have a fixed price at settlement.
Reason:
This is not a difference - it is true for both.
Correct AnswerQuestion
futures contracts do not have a predetermined settlement date.
2. A company produces 250,000 bushels of corn and plans to sell the corn
in January. If the company sells futures contracts for 250,000 bushels
of corn for $5 per bushel,
Multiple choice question.
it does not eliminate any losses or gains associated with future changes in
corn prices.
incorrect
Reason:
It eliminates both gains and losses.
it eliminates both losses and gains associated future changes in corn prices.
it eliminates gains associated with corn price increases but will lose money if
corn prices decrease.
Reason:
It eliminates both gains and losses.
it eliminates losses associated with corn price decreases but can benefit
from corn price increases.
Reason:
It eliminates both gains and losses.
Correct AnswerQuestion
it eliminates both losses and gains associated future changes in corn prices.
3. One characteristic of a derivative is that
Multiple choice question.
its value does not depend on other assets, rates, or indexes.
Reason:
Its value is derived from other assets, rates, or indexes.
it carries minimal risk.
Reason:
It carries a great deal of risk.
it requires a party to deliver or accept an asset.
Reason:
Usually, derivative contracts allow parties to pay cash for what they owe on
the contract instead of taking delivery.
it requires a small or no initial investment.
correct
Correct AnswerQuestion
it requires a small or no initial investment.
4. A forward contract
Multiple choice question.
requires a payment when goods are delivered in the future.
correct
allows prices to fluctuate in the future.
Reason:
A forward contract locks in a price.
requires a payment at the time of contract signing.
Reason:
The payment is due in the future when the goods are delivered.
requires a payment for goods that were delivered in the past.
Reason:
The goods will be delivered in the future.
Correct AnswerQuestion
requires a payment when goods are delivered in the future.
5. A futures contract differs from a forward contract in that
Multiple choice question.
futures contracts require small initial investments.
Reason:
This is not a difference - it is true for both.
futures contracts are publicly traded.
correct
forward contract values can be tied to commodity prices.
Reason:
This is not a difference - it is true for both.
forward contracts have a fixed price at settlement.
Reason:
This is not a difference - it is true for both.
Correct AnswerQuestion
futures contracts are publicly traded.
6. To convert synthetically floating rate debt to fixed rate debt, a
company would enter into a swap agreement where it
Multiple choice question.
pays the fixed rate and receives the variable rate.
pays the variable rate and receives the variable rate.
Reason:
It should pay fixed and receive variable.
pays the fixed rate and receives the fixed rate.
Reason:
It should pay fixed and receive variable.
pays the variable rate and receives the fixed rate.
incorrect
Reason:
It should pay fixed and receive variable.
Correct AnswerQuestion
pays the fixed rate and receives the variable rate.
7. To synthetically convert interest payments denominated in Yen to
interest payments denominated in U.S. dollars, a company would enter
into a swap contract where it
Multiple choice question.
pays U.S. dollars and receives Yen.
pays Yen and receives Yen.
Reason:
It pays U.S. dollars and receives yen.
pays Yen and receives U.S. dollars.
incorrect
Reason:
It pays U.S. dollars and pays yen.
pays U.S. dollars and receives U.S. dollars.
Reason:
It pays U.S. dollars and receives yen.
Correct AnswerQuestion
pays U.S. dollars and receives Yen.
8. Options (Check all that apply.)
Multiple select question.
hedge against downside risk while retaining the opportunity to benefit
from favorable movement.
correct
require no initial investment.
requires the holder to sell an asset at a specified date.
incorrect
gives the holder the right but not the obligation to buy or sell an asset.
incorrect
requires the holder to buy an asset at a specified date.
incorrect
Correct AnswerQuestion
hedge against downside risk while retaining the opportunity to benefit
from favorable movement.
gives the holder the right but not the obligation to buy or sell an asset.
9. A futures contract differs from a forward contract in that
Multiple choice question.
forward contract values can be tied to commodity prices.
Reason:
This is not a difference - it is true for both.
futures contracts do not have a predetermined settlement date.
forward contracts are publicly traded.
incorrect
Reason:
Futures contracts are publicly traded, not forward contracts.
forward contracts have a fixed price at settlement.
Reason:
This is not a difference - it is true for both.
Correct AnswerQuestion
futures contracts do not have a predetermined settlement date.
10. To synthetically convert interest payments denominated in U.S.
dollars to interest payments denominated in Yen, a company would
enter into a swap contract where it
Multiple choice question.
pays Yen and receives Yen.
Reason:
It pays Yen and receives U.S. dollars.
pays U.S. dollars and receives U.S. dollars.
Reason:
It pays Yen and receives U.S. dollars.
pays Yen and receives U.S. dollars.
pays U.S. dollars and receives Yen.
incorrect
Reason:
It pays Yen and receives U.S. dollars.
Correct AnswerQuestion
pays Yen and receives U.S. dollars.
11. Which of the following are true of options? (Check all that apply.)
Multiple select question.
A put option gives the holder the right to sell an asset for a specific
price.
incorrect
A put option requires the holder to sell an asset for a specific price.
A call option gives the holder the right to sell an asset for a specific
price.
A call option requires the holder to buy an asset for a specific price.
A put option gives the holder the right to buy an asset for a specific
price.
incorrect
A call option gives the holder the right to buy an asset for a specific
price.
correct
Correct AnswerQuestion
A put option gives the holder the right to sell an asset for a specific
price.
A call option gives the holder the right to buy an asset for a specific
price.
12. An example of a cash flow hedge would be the use of
Multiple choice question.
an interest rate swap to convert variable rate to fixed rate debt.
correct
a forward contract to guard against losses on an equity investment.
Reason:
This is a fair value hedge.
