Question :
50. If managers rational, they will hedge only when they perceive : 1284499
50. If managers are rational, they will hedge only when they perceive that:
A. prices are headed in an adverse direction.
B. derivative instruments are priced lower than actual value.
C. risk reduction is preferable to higher potential profits.
D. they can increase their profitability by doing so.
51. Manufacturers who are concerned about volatile commodity prices often use option contracts to alter their risks. What is the worst-case scenario for a seller of put options on corn with a strike price of $2.25 per bushel?
A. If corn prices drop below $2.25 the option premium will be lost.
B. If corn prices rise above $2.25 the option premium will be lost.
C. Losses can be unlimited if prices drop sufficiently.
D. Losses can be unlimited if prices rise sufficiently.
52. One distinguishing difference between the buyer of a futures contract and the buyer of an option contract is that the futures buyer:
A. pays a much higher premium than option buyers.
B. has an obligation to purchase, not a choice.
C. can lose no more than the initial premium.
D. has increased rather than reduced risk.
53. In general, when deciding whether a market participant needs to buy or sell futures contracts in order to hedge, the rule could be:
A. buy futures if you have the underlying asset and sell futures if you need the underlying asset.
B. sell futures if you have the underlying asset and buy futures if you need the underlying asset.
C. buy futures if you want to speculate, sell futures if you want to hedge.
D. buy futures if you are willing to have unlimited risk, sell futures if you want capped risk.
54. As time draws closer to contract expiration, futures contract prices can be expected to:
A. increase as the demand for delivery intensifies.
B. decrease as speculators resolve the uncertainty of prices.
C. move similarly to broad-based market indices, such as the S&P 500.
D. converge upon the spot price.
55. Why are most futures contracts not settled through delivery of the product?
A. Most contracts are settled through the margin account.
B. Most contracts expire with neither party having an obligation to the other party.
C. Most participants cancel their futures contracts through purchase of an option contract.
D. It is easier and cheaper to settle in cash or by offset.
56. Which of the following statements is correct for an interest rate swap?
A. There is an exchange on principal between counterparties.
B. There is no exchange of principal between counterparties.
C. There is an exchange of currencies between counterparties.
D. There is no exchange of cash between counterparties.
57. The typical sequence of cash flows in a futures contract is:
A. purchase price plus a margin account up-front, differences are settled at expiration.
B. margin account up-front, differences are posted daily and settled in cash if margin drops too low.
C. margin account up-front, all differences settled at expiration.
D. all funds are paid at expiration of the contract.
58. Financial futures are available to protect against all of the following except:
A. interest rate risk.
B. level of equity prices.
C. currency swap risk.
D. exchange rate risk.
59. Which of the following is not correct concerning the financial futures markets?
A. One of the prominent exchanges for financial futures is the Chicago Board of Trade.
B. The contracts were first traded in 1972.
C. A major use is protection from interest rate risk.
D. Trading in commodity futures significantly exceeds trading in financial futures.