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Unformatted text preview: Chapter 25 - Derivatives and Hedging Risk Chapter 25 Derivatives and Hedging Risk Multiple Choice Questions 1. A derivative is a financial instrument whose value is determined by: A. a regulatory body such as the FTC. B. a primitive or underlying asset. C. hedging a risk. D. hedging a speculation. E. None of the above. 2. Derivatives can be used to either hedge or 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. E. offset risks by speculating and increase risk by hedging. 3. 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. E. None of the above. 4. The buyer of a forward contract: A. will be taking delivery of the good(s) today at today's price. B. will be making delivery of the good(s) at a later date at that date's price. C. will be making delivery of the good(s) today at today's price. D. will be taking delivery of the good(s) at a later date at pre-specified price. E. Both A or D. 25-1 Chapter 25 - Derivatives and Hedging Risk 5. The main difference between a forward contract and a cash transaction is: A. only the cash transaction creates an obligation to perform. B. a forward is performed at a later date while the cash transaction is performed immediately. C. only one involves a deliverable instrument. D. neither allows for hedging. E. None of the above. 6. Futures contracts contrast with forward contracts by: A. trading on an organized exchange. 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. E. None of the above. 7. Which of the following is true about the user of derivatives? A. Derivatives usually appear explicitly in the financial statements. B. Academic surveys account for much of our knowledge of corporate derivatives use. C. Smaller firms are more likely to use derivatives than large firms. D. The most frequently used derivatives are commodity and equity futures. E. None of the above are true. 8. Which of the following terms is not part of a forward contract? A. Making delivery B. Taking delivery C. Delivery instrument D. Cash transaction E. None of the above. 9. Duration is a measure of the: A. yield to maturity of a bond. B. coupon yield of a bond. C. price of a bond. D. effective maturity of a bond....
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