Chapter 26 Quiz, Leasing




1. Insurance companies have some advantages in bearing risk; these include:
A.Superior ability to estimate the probability of loss
B.Extensive experience and knowledge about how to reduce the risk of a loss
C.The ability to pool risks and thereby gain from diversification
D.All of the above


2. A derivative is a financial instrument whose value is determined by:
A.A regulatory body such as the FTC
B.An underlying asset
C.Hedging a risk
D.Speculation


3. Derivatives can be used either to hedge or to speculate. These actions:
A.Increase risk in both cases
B.Decrease risk in both cases
C.Spread or minimize risk in both cases
D.Offset risk by hedging and increase risk by speculating


4. Futures contracts contrast with forward contracts by:
A.Trading on an organized exchanged
B.Marking to the market on a daily basis
C.Allowing the seller to deliver any day over the delivery month
D.All of the above


5. If you sold a wheat futures contract for $3.75 per bushel and the contract ended at $3.60, how much will you net per bushel? (Ignore transaction costs.)
A.$3.75
B.$0.15
C.$3.60
D.None of the above


6. On November 13, Al buys a July futures contract on 100 tons of soybean meal at a price of $172.0 a ton. On the same day, Bob sells this futures contract at the same price. On November 14, the July contract is trading at $174.2 a ton. Given that the contract is marked to market, what payments need to be made on the 14th? (Ignore transaction costs.)
A.Al pays the clearing house $220 and the clearing house pays Bob $220
B.Bob pays the clearing house $220 and the clearing house pays Al $220
C.Al pays the clearing house $172 and the clearing house pays Bob $174.2
D.None, no payments are made until July


7. The current level of Standard & Poor's index is 250. The prospective dividend yield is 3.2%, and the interest rate is 7%. What is the value of a one-year future on the index? (Assume all dividend payments occur at the end of the year.)
A.230.7
B.250.0
C.259.5
D.267.5


8. The spot price for delivery of home heating oil is $0.550 per gallon. The futures price for one year from now is $0.560. If the risk-free rate is 6% per year, what is the PV(net convenience yield)?
A.$0.041
B.$0.010
C.$0.022
D.$0.044


9. A forward contract carries an obligation to perform the terms of a contract. This is not like:
A.A cash transaction because a service is carried out but like on option because it is a deferred choice
B.An option because a service is performed but like a cash transaction because it is completed today
C.An option because the buyer has the choice to exercise but similar to a cash transaction in that a service is performed
D.A hedging transaction because a commitment has been undertaken with the forward


10. A forward contract is described by:
A.Agreeing today to buy a product at a later date at a price to be set in the future
B.Agreeing today to buy a product today at its current price
C.Agreeing today to buy a product at a later date at a price set today
D.Agreeing today to buy a product if and only if its price rises above the exercise price today at its current price


11. Suppose that the spot rate of exchange is $1 = 5 French francs. Suppose also that the 1-year interest rate is 7.5% for dollars and 9% for French francs. What is the 1-year forward rate of exchange between dollars and francs?
A.$1 = 6.00 francs
B.$1 = 5.86 francs
C.$1 = 4.93 francs
D.$1 = 5.07 francs


12. If the one-year spot interest rate is 10% and two-year spot interest rate is 12%, calculate the one-year forward interest rate one year from today (approximately):
A.10%
B.12%
C.14%
D.None of the above


13. First National Bank has made a 5-year, $100 million fixed-rate loan at 10%. Annual interest payments are $10 million, and all principal will be repaid in year 5. The bank wants to swap the fixed interest payment into a floating-rate annuity. If the bank could borrow at a fixed rate of 8% for 5 years, what is the notional principal of the swap?
A.$80 million
B.$100 million
C.$125 million
D.$180 million


14. A chocolate company which uses the futures market to lock in the price of cocoa to protect a profit is an example of:
A.A long hedge
B.A short hedge
C.Purchasing futures to guard against a potential loss
D.Both A and C


15. Duration of a pure discount bond is:
A.Equal to its half-life
B.Less than a zero coupon bond
C.Equal to its liabilities hedged
D.Equal to its maturity



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