A) Buying inverse floaters.
B) Entering into an interest rate swap where the bank receives a fixed payment stream,and in return agrees to make payments that float with market interest rates.
C) Purchase principal only (PO) strips that decline in value whenever interest rates rise.
D) Enter into a short hedge where the bank agrees to sell interest rate futures.
E) Sell some of the bank's floating-rate loans and use the proceeds to make fixed-rate loans.
G) B) and D)
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A) Straddle option.
B) Put option.
C) Out-of-the-money option.
D) Naked option.
E) Covered option.
G) None of the above
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E
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A) Risk management can reduce the volatility of cash flows,and this decreases the probability of bankruptcy.
B) Risk management makes sense for firms directly engaged in activities that involve commodities whose values can be hedged,but it doesn't make much sense for most other firms.
C) Companies with volatile earnings pay more taxes than companies with more stable earnings due to the treatment of tax credits and the rules governing corporate loss carry-forwards and carry-backs.Therefore,our tax system encourages risk management to stabilize earnings.
D) Risk management can reduce the likelihood of low cash flows,and therefore reduce the probability of financial distress.
E) Risk management involves identifying events that could have adverse financial consequences and then taking actions to prevent and/or to minimize the damage caused by these events.
G) C) and D)
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A) The price of the call option will increase by $2.
B) The price of the call option will increase by less than $2,but the percentage increase in price will be more than 10%.
C) The price of the call option will increase by less than $2,and the percentage increase in price will be less than 10%.
D) The price of the call option will increase by more than $2.
E) The price of the call option will increase by more than $2,but the percentage increase in price will be less than 10%.
G) A) and C)
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A) $5.06
B) $4.95
C) $5.75
D) $5.46
E) $5.69
G) C) and D)
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A) One advantage of forward contracts is that they are default free.
B) Futures contracts generally trade on an organized exchange and are marked to market daily.
C) Goods are never delivered under forward contracts,but are almost always delivered under futures contracts.
D) Forward contracts are generally standardized instruments,whereas futures contracts are generally tailor-made for the 2 parties of the contract.
E) Essentially there are no differences between forward and futures contracts,except that forward contracts are used only for financial assets while futures contracts are used only for commodities.
G) B) and E)
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A) Call option.
B) Put option.
C) Out-of-the-money option.
D) Naked option.
E) Covered option.
G) B) and D)
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A) An option's value is determined by its exercise value,which is the market price of the stock less its strike price.Thus,an option can't sell for more than its exercise value.
B) As a stock's price increases,the premium portion of an option on that stock increases because the difference between the stock price and the fixed strike price increases.
C) If the company is consistently profitable,its call options will always be in the money.
D) The market value of an option depends in part on the option's length of time until expiration and on the variability of the underlying stock's price.
E) The potential loss on an option decreases as the option sells at higher and higher prices because the profit margin becomes larger.
G) A) and E)
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A) The price of call options will rise if XYZ's stock price rises.
B) The higher the strike price,the higher the call option price.
C) Assuming the same strike price,a call option that expires in 1 month will sell for a higher price than one that expires in 3 months.
D) The less volatile a stock's price,the more valuable a call option on the stock is.
E) If the risk-free rate of interest increases,the value of call options will decrease.
G) C) and E)
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A) $38
B) $55
C) $51
D) $56
E) $45
G) B) and D)
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A) 5.04%
B) 4.33%
C) 5.34%
D) 3.83%
E) 4.28%
G) C) and D)
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A) Risk management can increase debt capacity.
B) Risk management can help a firm maintain its optimal capital budget.
C) Risk management can reduce the expected costs of financial distress.
D) Risk management can help firms minimize taxes.
E) Risk management can allow managers to defer receipt of their bonuses and thus postpone tax payments.
G) A) and D)
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E
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B) False
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A) $6.00
B) $6.06
C) $5.46
D) $7.32
E) $6.66
G) A) and D)
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A) 7.35%
B) 8.30%
C) 7.28%
D) 8.15%
E) 5.97%
G) C) and E)
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A) The longer the time until the call option expires the smaller its value and the smaller its premium.
B) An option on an extremely volatile stock is worth less than one on a very stable stock.
C) The price of a call option increases as the risk-free rate increases.
D) Two call options on the same stock will have the same value even if they have different strike prices.
E) If you observe that a put option on a stock increases in value,then a call option on that same stock also increases in value.
G) C) and D)
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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 very 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.
G) A) and C)
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A) Futures.
B) Options.
C) Swaps.
D) Forward contracts.
E) Preferred stock.
G) C) and D)
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A) $2.90
B) $2.50
C) $2.18
D) $2.28
E) $2.93
G) A) and E)
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B
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B) False
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