Question 1

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 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) A) and D)
G) B) and D)

Question 2

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 B)
G) A) and C)

Question 3

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) B) and C)
G) A) and C)

Question 4

Looking at The Wall Street Journal you observe that the settlement price on a hypothetical 15-year, semiannual payment, 6% coupon bond is 105-21. If the bond has a $1,000 par value, what is the implied Treasury bond rate?

Accepted Answer

A)   5.44%
B)   5.72%
C)   6.00%
D)   6.30%
E)   6.62%F) A) and B)
G) B) and E)

Question 5

In theory, reducing the volatility of its cash flows will always increase a company's value.

Accepted Answer

A) True 
 B)False

Question 6

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

Question 7

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) C) and D)
G) D) and E)

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A)   Put options give investors the right to buy a stock at a certain exercise price before a specified date.
B)   Call options give investors the right to sell a stock at a certain exercise price before a specified date.
C)   Options typically sell for less than their exercise value.
D)   LEAPS are short-term options that have begun trading on the exchanges in recent years.
E)   Option holders are not entitled to receive dividends unless they choose to exercise their option.F) D) and E)
G) None of the above

Exam 18: Derivatives and Risk Management

In theory, reducing the volatility of its cash flows will always increase a company's value.

Correct Answer
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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
verified

Which of the following statements is CORRECT?

Correct Answer
verified

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
verified

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
verified

Looking at The Wall Street Journal you observe that the settlement price on a hypothetical 15-year, semiannual payment, 6% coupon bond is 105-21. If the bond has a $1,000 par value, what is the implied Treasury bond rate?

Correct Answer
verified

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
verified

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

Correct Answer
verified

Exam 18: Derivatives and Risk Management

In theory, reducing the volatility of its cash flows will always increase a company's value.

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 statements is CORRECT?

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

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

Looking at The Wall Street Journal you observe that the settlement price on a hypothetical 15-year, semiannual payment, 6% coupon bond is 105-21. If the bond has a $1,000 par value, what is the implied Treasury bond rate?

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 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

Correct Answer
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Correct Answer
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Correct Answer
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