1A call option price will increase, all else equal, when:
a. the price of the underlying asset decreases
b. the interest rates in the market decreases
c. the time to maturity decreases
d. the exercise price increases
e. the volatility of the return of the underlying asset increases.
Answer E.
2The type(s) of risk that is (are) generally hedged with derivative contracts include all of the following except: a. commodity price risk
b. foreign exchange risk
c. interest rate risk
d. property damage
e. none of the above, i.e. they are all commonly hedged with derivatives.
Answer D
3Which of the following is TRUE about a futures contract?
a. the payoff is equal to the difference between the price of the underlying asset & the price set in the futures contract. b. the payoff is the same as that of a call option.
c. Futures contracts always require delivery of the underlying asset to complete the contract. d. The futures price is paid by the buyer at the outset of the contract.
Answer A
4The current spot price of oil is $12 per barrel, the relevant interest rate is 8% and the cost of storing & insuring oil for 1 year is 1% of the value of the oil. What would be the no arbitrage futures price today on a contract that expires 1 year from now? a. 12.00
b. 12.96
c. 13.08
d. 13.20
e. 21.00
Answer C
5According to the text, which of the following risk management tools would generally have the least basis risk? a. option contract
b. futures contract
c. forward contract
d. swap contract
e. insurance contract
Answer E
6Which of the following is TRUE?
a. futures contracts tend to by standardized, while forward contracts tend to be customized. b. futures contracts tend to by customized, while forward contracts tend to be standardized.
Answer A
7Which of the following derivative instruments provides the owner of the contract with an obligation rather than a right? a. option contracts
b. futures contracts
c. swap contracts
d. all of the above
e. only b & c above
Answer E
8Large firms have tended to increase their retention levels and their use of alternative risk transfer mechanisms. a. more true than false
b. more false than true
Answer A
9ALL of the following would generally be considered as alternative risk transfer mechanisms, except which one? a. contingent equity
b. committed credit lines
c. structured debt contracts
d. captives
e. none of the above, i.e. all are considered possible alternative risk transfer mechanisms
Answer E
10An insurance company that is set up as a subsidiary of a parent for the sole purpose of providing insurance to the parent corporation is commonly known as: a. a subsidiary insurance company
b. an offshore insurance company
c. a captive insurance company
d. an illegally insurance scam
Answer c.