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CHAPTER 23 DERIVATIVES AND RISK MANAGEMENT True/False Easy: (23.1) Risk management Answer: a EASY 1 . One objective of risk management can be to reduce the volatility of a firm’s cash flows. a. True b. False (23.4) Swaps Answer: b EASY 2 . Interest rate swaps allow a firm to exchange fixed for floating - rate payments, but a swap cannot reduce act ual net interest expenses. a. True b. False (23.5) Speculative versus pure risk Answer: a EASY 3 . Speculative risks are symmetrical in the sense that they offer the chance of a gain as well as a loss, while pure risks are those that can only lead to losses. a. True b. False (23.6) Risk management Answer: b EASY 4 . In theory, reducing the volatility of its cash flows will always increase a company’s value. a. True b. False Medium: (23.6) Futures market hedging Answer: b MEDIUM 5 . The two basic types of hedges involving the futures market are long hedges and short hedges, where the words "long" and "short" refer to the maturity of the hedging instrument. For example, a long hedge might use Treasury bonds, while a short hedge might use 3-month T- bills. a. True b. False Chapter 23: Derivatives True/False Page 127
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Multiple Choice: Conceptual Medium: (23.1) Risk management Answer: e MEDIUM 6 . Which of the following are NOT ways risk management can be used to increase the value of a firm? a. Risk management can increase debt capacity. b. Risk management can help a firm maintain its optimal capital budget. c. Risk management can reduce the expected costs of financial distress. d. Risk management can help firms minimize taxes. e. Risk management can allow managers to defer receipt of their bonuses and thus postpone tax payments. (23.1) Interest rate and reinvestment rate risk Answer: b MEDIUM 7 . Which of the following statements about interest rate and reinvestment rate risk is CORRECT? a. Variable (or floating) rate securities have more interest rate
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This note was uploaded on 08/27/2011 for the course FI516 FI516 taught by Professor Fi516 during the Spring '11 term at Keller Graduate School of Management.

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