Question 1

You think that market interest rates are going to ﬂuctuate, but you don't know whether they will go up or down. One thing you could do to limit your risk exposure in either case would be to
______________.

Accepted Answer

Buying an interest rate collar would limit the risk exposure in either case of market interest rate fluctuations. An interest rate collar consists of buying an interest rate cap, which would limit the exposure to increasing interest rates, and selling an interest rate floor, which would limit the exposure to decreasing interest rates. This strategy can help to protect against significant losses caused by changes in interest rates while still allowing some flexibility for potential gains. Selling Treasury bonds (A) or options (D) and buying Treasury bond futures (E) do not provide the same level of protection against interest rate fluctuations as an interest rate collar. Buying Treasury bonds (B) may provide some protection against interest rate increases, but it would also result in losses if interest rates were to decrease.

Question 2

A put option on the level of an interest rate is called an interest rate ____________.

Accepted Answer

A put option on the level of an interest rate is called an interest rate floor. It provides the holder with protection against interest rates falling below a certain level.

Question 3

Ted purchased a futures option on cotton with a strike price of 51. If Ted exercises this option, he will receive:

Accepted Answer

The answer of Ted purchased a futures option on cotton...

Question 4

You are the buyer for a cereal company. You think you will need 120,000 bushels of corn next month. The futures contracts on corn are based on 5,000 bushels and are currently quoted at
264)3 cents per bushel for delivery next month. If you want to hedge your cost risk, you should
_____ contracts at a current value of _____ per contract.

Accepted Answer

To hedge the cost risk of purchasing 120,000 bushels of corn, the buyer needs to buy futures contracts on corn.

First, we need to calculate how many contracts the buyer needs:

120,000 bushels / 5,000 bushels = 24 contracts

Next, we need to calculate the cost per contract:

264.3 cents per bushel = $2.643 per bushel 
$2.643 per bushel x 5,000 bushels = $13,215 per contract

Therefore, the buyer should buy 24 contracts at a current value of $13,215 per contract.

Option A is not enough contracts to hedge the necessary amount of bushels. 
Option B is too many contracts for the necessary amount of bushels. 
Option D and E involve selling contracts, which is not a suitable strategy for a buyer looking to hedge cost risk.

Question 5

When a strategy is put in place to limit the rate of interest that a ﬁrm pays on its debt such that the rate will remain within a stated upper and lower bound, the ﬁrm is said to have created an interest
Rate:

Accepted Answer

A collar is a combination of a cap and a floor, creating upper and lower bounds for a firm's interest rate. By having both a cap and a floor in place, the firm sets a range for their interest rate, providing them with more stability and predictability in their debt payments.

Question 6

Monique grows and exports cocoa. Her crop was partially ruined in a storm, so she needs to purchase 20 tons of cocoa in three months to meet prior contractual obligations. Monique wants to
Hedge against price changes. Each futures contract is for 10 metric tons. The current quote for the
Contract is 1,447 per ton. Monique should _____ 2 futures contracts with a total contract value of:

Accepted Answer

Monique wants to hedge against price changes, so she should buy futures contracts. Each futures contract is for 10 metric tons, and she needs to purchase 20 tons of cocoa, so she should buy 2 futures contracts. The current quote for the contract is 1,447 per ton, so the total contract value is 2 * 10 * 1,447 = $28,940.

Question 7

You own shares of a stock. You believe the stock price will increase in the future. However, you realize the stock price could decline and want to hedge that risk. Which one of the following option
Positions should you take to create the desired hedge?

Accepted Answer

Buying a put option gives the buyer the right to sell the underlying stock at a predetermined price (strike price) before the expiration date. If the stock price declines, the put option will increase in value, offsetting the loss in the stock. Therefore, buying a put option creates a hedge against a decline in the stock price while allowing the investor to benefit from the potential upside. Buying a call option would increase in value if the stock price increases, but it does not protect against a decline in the stock price. Selling a call or put option would create an obligation for the seller and does not create a hedge for the buyer.

Question 8

A combination between which two of the following ﬁrms is most apt to reduce each ﬁrm's ﬁnancial risk exposure?

Accepted Answer

A clothing manufacturer combining with a cotton farmer can reduce financial risk exposure by securing a stable supply of raw materials, thus reducing the risk of price fluctuations and supply chain disruptions.

Question 9

You think that market interest rates are going to fall. In order to make money (or to reduce losses), you could _______________.

Accepted Answer

The answer of You think that market interest rates are...

Question 10

You are considering two option contracts with the same strike price. Ignoring costs, which one of the following combinations will increase the value of a ﬁrm if prices move either up or down?

Accepted Answer

Buying both a call and a put (a straddle) allows the firm to profit from significant price movements in either direction, increasing the firm's value if prices move up or down.

Question 11

A ﬁrm with a variable-rate loan can purchase an interest rate _____ to protect itself from increases in interest rates.

Accepted Answer

A cap is a type of interest rate option that allows the borrower to set a maximum limit on the interest rate they will pay on a variable-rate loan. This protects the borrower from increases in interest rates beyond the set cap level.

Question 12

A call option on the level of an interest rate is called an interest rate ______________.

Accepted Answer

A call option on the level of an interest rate that sets a maximum level for the interest rate is called an interest rate cap because it limits the issuer's exposure to rising interest rates.

Question 13

You believe the price of a stock is going to decline within the next three months. Which one of the following option payoff proﬁles will reﬂect a proﬁt if your belief is correct?

Accepted Answer

Buying a put option gives the holder the right, but not the obligation, to sell the underlying stock at a predetermined price (strike price) within a certain time period (expiration date). If the price of the stock decreases, the value of the put option increases, resulting in a profit for the holder. Therefore, buying a put option is the best choice for profiting from a predicted decrease in the stock price.

Question 14

Leando Enterprises has a variable rate loan and wants to lock in the rate so that the ﬁrm is in essence paying no more than 8.5% nor less than 7.5%. To do this, the ﬁrm needs to ____ a call and
____ a put option on interest rates.

Accepted Answer

Leando Enterprises needs to protect themselves from interest rate increases by buying a call option. Buying a put option will protect them from interest rate decreases. Therefore, the best choice is to buy a call option and sell a put option, which is represented by choice B.

Question 15

Santiago grows cotton, which he sells on the market. He estimates his crop this year at 200,000 pounds. Futures contracts on cotton are priced at 60.54 cents per pound with a contract size of
50,000 pounds. Santiago wants to hedge against price risk. Santiago should _____ 4 contracts at a
Total contract value of:

Accepted Answer

Santiago should sell futures contracts to hedge against price risk. He needs 4 contracts (200,000 pounds / 50,000 pounds per contract). The total contract value is 200,000 pounds * $0.6054 = $121,080.

Question 16

The _______ of a forward contract is obligated to ______ delivery and pay for the contracted goods at the forward price; the _______ of a forward contract is obligated to ______ delivery and
Accept payment for the goods at the forward price.

Accepted Answer

The answer of The _______ of a forward contract is...

Question 17

A ﬁrm with a variable-rate loan can purchase an interest rate _____ to protect itself from increases in interest rates.

Accepted Answer

A cap is a financial instrument that sets a maximum limit on the interest rate a borrower will have to pay on their variable-rate loan. This protection is useful in case interest rates rise, which could cause the borrower's payments to become unmanageable. A floor is a financial instrument that sets a minimum limit on the interest rate a borrower will pay, which would not be useful for protecting against interest rate increases. Walls, hats, and cloaks have nothing to do with financial instruments.

Question 18

You are the buyer for a cereal company. You think you will need 120,000 bushels of corn next month. The futures contracts on corn are based on 5,000 bushels and are currently quoted at 416´0
Cents per bushel for delivery next month. If you want to hedge your cost, you should _____
Contracts at a current value of _____ per contract.

Accepted Answer

The answer of You are the buyer for a cereal...

Question 19

Cereal Delites uses corn as the primary ingredient in their cereal. As a result, the ﬁrm has a down sloping risk proﬁle which shows that it will suffer a ﬁnancial loss if the price of corn rises. To offset
This risk, the ﬁrm should _____ a forward contract on corn with a payoff proﬁle that is _____.

Accepted Answer

To offset the risk of a loss due to rising corn prices, the firm should buy a forward contract on corn with an up-sloping payoff profile. This means that as the price of corn rises, the payoff from the contract will also increase, helping to offset the financial loss from the increased cost of the corn used in their cereal. Choice A is incorrect because selling a forward contract would increase the firm's risk exposure to rising corn prices. Choices C and D are incorrect because a horizontal payoff profile would not provide any protection against price movements. Choice E is incorrect because selling a forward contract with an up-sloping payoff profile would increase the firm's risk exposure to rising corn prices.

Question 20

At one time, exchange rates were more or less ﬁxed at speciﬁed levels by the _____________.

Accepted Answer

The Bretton Woods Accord was an international agreement reached after World War II to establish a system of fixed exchange rates. It established the U.S. dollar as the world's reserve currency and pegged it to gold at a fixed rate, while other currencies were pegged to the dollar. This system remained in place until it was abandoned in 1971. The other options listed, such as the Ontario Securities Commission (OSC) and Securities and Exchange Commission (SEC), are regulatory bodies that do not have the authority to set exchange rates, while the Foreign Exchange Act and Global Exchange Agreement are not historical agreements known to have set exchange rates.

Quiz 24: Options and Corporate Finance

You think that market interest rates are going to ﬂuctuate, but you don't know whether they will go up or down. One thing you could do to limit your risk exposure in either case would be to ______________.

A put option on the level of an interest rate is called an interest rate ____________.

Ted purchased a futures option on cotton with a strike price of 51. If Ted exercises this option, he will receive:

When a strategy is put in place to limit the rate of interest that a ﬁrm pays on its debt such that the rate will remain within a stated upper and lower bound, the ﬁrm is said to have created an interest Rate:

You own shares of a stock. You believe the stock price will increase in the future. However, you realize the stock price could decline and want to hedge that risk. Which one of the following option Positions should you take to create the desired hedge?

A combination between which two of the following ﬁrms is most apt to reduce each ﬁrm's ﬁnancial risk exposure?

You think that market interest rates are going to fall. In order to make money (or to reduce losses) , you could _______________.

You are considering two option contracts with the same strike price. Ignoring costs, which one of the following combinations will increase the value of a ﬁrm if prices move either up or down?

A ﬁrm with a variable-rate loan can purchase an interest rate _____ to protect itself from increases in interest rates.

A call option on the level of an interest rate is called an interest rate ______________.

You believe the price of a stock is going to decline within the next three months. Which one of the following option payoff proﬁles will reﬂect a proﬁt if your belief is correct?

Leando Enterprises has a variable rate loan and wants to lock in the rate so that the ﬁrm is in essence paying no more than 8.5% nor less than 7.5%. To do this, the ﬁrm needs to a call and a put option on interest rates.

The ___ of a forward contract is obligated to delivery and pay for the contracted goods at the forward price; the _ of a forward contract is obligated to __ delivery and Accept payment for the goods at the forward price.

A ﬁrm with a variable-rate loan can purchase an interest rate _____ to protect itself from increases in interest rates.

At one time, exchange rates were more or less ﬁxed at speciﬁed levels by the _____________.

Quiz 24: Options and Corporate Finance

You think that market interest rates are going to ﬂuctuate, but you don't know whether they will go up or down. One thing you could do to limit your risk exposure in either case would be to ______________.

A put option on the level of an interest rate is called an interest rate ____________.

Ted purchased a futures option on cotton with a strike price of 51. If Ted exercises this option, he will receive:

When a strategy is put in place to limit the rate of interest that a ﬁrm pays on its debt such that the rate will remain within a stated upper and lower bound, the ﬁrm is said to have created an interest Rate:

You own shares of a stock. You believe the stock price will increase in the future. However, you realize the stock price could decline and want to hedge that risk. Which one of the following option Positions should you take to create the desired hedge?

A combination between which two of the following ﬁrms is most apt to reduce each ﬁrm's ﬁnancial risk exposure?

You think that market interest rates are going to fall. In order to make money (or to reduce losses) , you could _______________.

You are considering two option contracts with the same strike price. Ignoring costs, which one of the following combinations will increase the value of a ﬁrm if prices move either up or down?

A ﬁrm with a variable-rate loan can purchase an interest rate _____ to protect itself from increases in interest rates.

A call option on the level of an interest rate is called an interest rate ______________.

You believe the price of a stock is going to decline within the next three months. Which one of the following option payoff proﬁles will reﬂect a proﬁt if your belief is correct?

Leando Enterprises has a variable rate loan and wants to lock in the rate so that the ﬁrm is in essence paying no more than 8.5% nor less than 7.5%. To do this, the ﬁrm needs to ____ a call and ____ a put option on interest rates.

The _______ of a forward contract is obligated to ______ delivery and pay for the contracted goods at the forward price; the _______ of a forward contract is obligated to ______ delivery and Accept payment for the goods at the forward price.

A ﬁrm with a variable-rate loan can purchase an interest rate _____ to protect itself from increases in interest rates.

At one time, exchange rates were more or less ﬁxed at speciﬁed levels by the _____________.

Leando Enterprises has a variable rate loan and wants to lock in the rate so that the ﬁrm is in essence paying no more than 8.5% nor less than 7.5%. To do this, the ﬁrm needs to a call and a put option on interest rates.

The ___ of a forward contract is obligated to delivery and pay for the contracted goods at the forward price; the _ of a forward contract is obligated to __ delivery and Accept payment for the goods at the forward price.