Question 1

Use the information for the question(s) below.
Your firm faces an 8% chance of a potential loss of $50 million next year. If your firm implements new safety policies, it can reduce the chance of this loss to 3%, but the new safety policies have an upfront cost of $250,000. Suppose that the beta of the loss is 0 and the risk-free rate of interest is 5%.
-Farmville Industries is a major agricultural firm and is concerned about the possibility of drought impacting corn production.In the event of a drought,Farmville Industries anticipates a loss of $75 million.Suppose the likelihood of a drought is 10% per year,and the beta associated with such a loss is 0.4.If the risk-free interest rate is 5% and the expected return on the market is 10%,then what is the actuarially fair insurance premium?

Accepted Answer

The expected loss = $75 million × .10 = ...

Question 2

A currency forward contract specifies all of the following EXCEPT:

Accepted Answer

A)   The amount of currency to exchange
B)   The spot exchange rate
C)   The delivery date on which the exchange will take place
D)   The currencies to be exchangedE) A) and C)
F) A) and B)

Question 3

The most common strategies are ________.

Accepted Answer

A)   horizontal integration and storage
B)   vertical integration and storage
C)   vertical integration and diversification
D)   horizontal integration and diversificationE) A) and C)
F) A) and B)

Question 4

The cash-and-carry strategy consists of all of the following simultaneous trades EXCEPT:

Accepted Answer

A)   Borrow euros today using a one-year loan with the interest rate r€
B)   Exchange the euros for dollars today at the spot exchange rate S $/€
C)   Purchase a forward contract to convert $ to €
D)   Invest the dollars today for one year at the interest rate r$E) A) and D)
F) A) and C)

Question 5

The risk that the firm will not have,or be able to raise,the cash required to meet the margin calls on its hedges is called

Accepted Answer

A)   liquidity risk.
B)   basis risk.
C)   commodity price risk.
D)   speculation risk.E) All of the above
F) A) and D)

Question 6

Like most foreign exchange rates,the dollar/euro rate is a floating rate,which means it changes constantly depending on the quantity supplied and demanded for each currency in the market.The supply and demand for each currency is driven directly by all of the following factors EXCEPT:

Accepted Answer

A)   Relative inflation
B)   Firms trading goods
C)   Investors trading securities
D)   The actions of central banks in each countryE) A) and D)
F) A) and C)

Question 7

Which of the following statements is false?

Accepted Answer

A)   Long-term supply contracts cannot be entered into anonymously; the buyer and seller know each other's identity. This lack of anonymity may have strategic disadvantages.
B)   A futures contract is an agreement to trade an asset on some future date, at a price that is locked in today.
C)   An alternative to vertical integration or storage is a long-term supply contract.
D)   Long-term supply contracts are unilateral contracts negotiated by a seller.E) B) and D)
F) C) and D)

Question 8

Which of the following statements is false?

Accepted Answer

A)   The swap contract-like forward and futures contracts-is typically structured as a "zero-cost" security.
B)   An interest rate swap is a contract entered into with a bank, much like a forward contract, in which the firm and the bank agree to exchange the coupons from two different types of loans.
C)   In a standard interest rate swap, one party agrees to pay coupons based on a fixed interest rate in exchange for receiving coupons based on the prevailing market interest rate during each coupon period.
D)   If short-term interest rates were to fall while long-term rates remained stable, then short-term securities would fall in value relative to long-term securities, despite their shorter duration.E) C) and D)
F) None of the above

Question 9

The insurance payment to the firm tends to be ________ when total losses are ________ and the market portfolio is ________.

Accepted Answer

A)   smaller; high; low
B)   larger; high; low
C)   larger; low; high
D)   smaller; low; highE) All of the above
F) A) and B)

Question 10

Which of the following statements is false?

Accepted Answer

A)   Interest rate swaps are an alternative means of modifying the firm's interest rate risk exposure without buying or selling assets.
B)   A portfolio with a negative duration is called a duration-neutral portfolio or an immunized portfolio, which means that for small interest rate fluctuations, the value of equity should remain unchanged.
C)   Maintaining a duration-neutral portfolio will require constant adjustment as interest rates change.
D)   A duration-neutral portfolio is only protected against interest rate changes that affect all yields identically.E) None of the above
F) A) and D)

Exam 30: Risk Management

Like most foreign exchange rates,the dollar/euro rate is a floating rate,which means it changes constantly depending on the quantity supplied and demanded for each currency in the market.The supply and demand for each currency is driven directly by all of the following factors EXCEPT:

Correct Answer
verified

The cash-and-carry strategy consists of all of the following simultaneous trades EXCEPT:

Correct Answer
verified

The risk that the firm will not have,or be able to raise,the cash required to meet the margin calls on its hedges is called

Correct Answer
verified

Which of the following statements is false?

Correct Answer
verified

A currency forward contract specifies all of the following EXCEPT:

Correct Answer
verified

The most common strategies are ________.

Correct Answer
verified

Correct Answer
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The expected loss = $75 million × .10 = ...
View Answer

The insurance payment to the firm tends to be when total losses are and the market portfolio is .

Correct Answer
verified

Which of the following statements is false?

Correct Answer
verified

Which of the following statements is false?

Correct Answer
verified

Exam 30: Risk Management

Like most foreign exchange rates,the dollar/euro rate is a floating rate,which means it changes constantly depending on the quantity supplied and demanded for each currency in the market.The supply and demand for each currency is driven directly by all of the following factors EXCEPT:

Correct AnswerverifiedShow Answer

The cash-and-carry strategy consists of all of the following simultaneous trades EXCEPT:

Correct AnswerverifiedShow Answer

The risk that the firm will not have,or be able to raise,the cash required to meet the margin calls on its hedges is called

Correct AnswerverifiedShow Answer

Which of the following statements is false?

Correct AnswerverifiedShow Answer

A currency forward contract specifies all of the following EXCEPT:

Correct AnswerverifiedShow Answer

The most common strategies are ________.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedThe expected loss = $75 million × .10 = ...View AnswerShow Answer

The insurance payment to the firm tends to be ________ when total losses are ________ and the market portfolio is ________.

Correct AnswerverifiedShow Answer

Which of the following statements is false?

Correct AnswerverifiedShow Answer

Which of the following statements is false?

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified
The expected loss = $75 million × .10 = ...
View Answer

The insurance payment to the firm tends to be when total losses are and the market portfolio is .

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified