1.An example of interest-rate risk is:
(a)variability in after-tax cash flows due to the entrance of new competitors.
(b)variability in after-tax cash flows due to an increase in LIBOR.
(c)variability in after-tax cash flows due to increased operating expenses.
(d)variability in after-tax cash flows due to changes in depreciation schedules.
2.Which security's price would be most affected by interest rate changes?
(a)A floating-rate ten-year bond.
(b)A 90-day U.S. Treasury bill.
(c)A fixed-rate five-year bond.
(d)A fixed-rate one-year bond.
3.Long-term interest rates:
(a)are more volatile than short-term interest rates.
(b)are less volatile than short-term interest rates.
(c)exhibit the same degree of volatility as short-term interest rates.
(d)are always higher than short-term interest rates.
4.The duration of a ten-year zero-coupon bond:
(a)will be greater than the duration of a ten-year 8 percent fixed-coupon bond.
(b)will be less than the duration of a ten-year 8 percent fixed-coupon bond.
(c)will be the same as a ten-year 8 percent fixed-coupon bond.
(d)will stay the same even if its price changes during the course of the next month.
5.According to the expectations theory of the yield curve, an upward-sloping yield curve means that market participants expect:
(a)interest rates to rise.
(b)interest rates to stay the same.
(c)interest rates to fall.
(d)bond prices to fall.
6.According to the liquidity-preference theory of the term structure of interest rates:
(a)short-term interest rates will always be less than long-term interest rates.
(b)investors demand a liquidity premium for lending long-term funds.
(c)investor expectations of future interest rates do not affect the shape of the yield curve.
(d)long-term interest rates are unrelated to short-term interest rates.
7.Which of the following is not a potential benefit of financial risk management?
(a)A lowered overall cost of capital.
(b)An increase in the firm's debt capacity.
(c)The ability to pass on higher costs to customers through product price increases.
(d)A reduction in agency costs arising from the separation of management and ownership.
8.If Eurodollar interest rates are lower than Euromark interest rates:
(a)the dollar price of forward marks will be less than the spot price.
(b)the dollar price of forward marks will be more than the spot price.
(c)the dollar price of forward marks will be the same as the spot price.
(d)the dollar price of forward marks may be more or less than the spot price.
9.A forward exchange contract to sell German marks in sixty days can be replicated:
(a)by borrowing dollars, converting them to marks, and placing them in a Euromark deposit.
(b)by borrowing marks, converting them to dollars, and placing them in a Eurodollar deposit.
(c)by borrowing dollars and placing them in a Eurodollar deposit.
(d)by borrowing marks and placing them in a Euromark deposit.
10.The interest rate on three-month Eurodollar deposits is 9 percent. The interest rate on three-month Eurosterling deposits is 12 percent; therefore:
(a)on an annualized basis, forward sterling will be about 3 percent cheaper than spot sterling.
(b)on an annualized basis, forward sterling will be about 3 percent more expensive than spot sterling.
(c)on an annualized basis, forward sterling will be the same price as spot sterling.
(d)there is not connection between Eurocurrency interest rates and forward exchange rates.
11.A forward exchange rate contract:
(a)requires payment immediately upon entering into the contract.
(b)is marked to market on a daily basis.
(c)does not require payment until the contract's maturity date.
(d)never affects the credit line of the company taking out the forward contract.
12.A Eurodollar deposit is:
(a)a dollar deposit in a U.S. bank anywhere in the world, including the U.S.
(b)a dollar deposit in a U.S. bank in the U.S.
(c)a dollar deposit in any bank in the U.S.
(d)a dollar deposit in a bank outside of the U.S.
13.A forward rate contract on interest rates is:
(a)an interest rate option.
(b)an FRA.
(c)a Eurodollar CD.
(d)a cylinder.
14.If the one-year Euroyen rate is 7 percent and the two-year Euroyen rate is 6 percent, the one-year forward rate implicit in the Eurodollar yield curve is very close to:
(a)7 percent.
(b)6 percent.
(c)8 percent.
(d)5 percent.
15.Futures contracts:
(a)are less liquid than forward contracts.
(b)are usually more costly than option contracts for setting hedges.
(c)are standardized with respect to maturity dates, but not quantities.
(d)are standardized with respect to maturity and contract size.
16.Unlike a forward contract, a futures contract is:
(a)not a legally enforceable obligation.
(b)not subject to price limit movements.
(c)marked to market on a daily basis.
(d)not used to hedge interest rate risk.
17.A person wanting to lock in an exchange rate for paying a foreign-currency-denominated bill would:
(a)sell a foreign currency futures contract.
(b)buy a foreign currency futures contract.
(c)sell an interest rate futures contract.
(d)buy an interest rate futures contract.
18.As a currency futures contract nears its maturity date:
(a)basis risk increases.
(b)basis risk decreases.
(c)basis risk stays the same.
(d)basis risk first increases and then decreases.
19.On a futures contract expiration date:
(a)the settlement price is likely to be higher than the spot price.
(b)the settlement price is likely to be lower than the spot price.
(c)the settlement price is likely to be the same as the spot price.
(d)the settlement price is not calculated.
20.Each basis point for a three-month Eurodollar futures contract traded on the IMM is equal to:
(a)$100.
(b)$10.
(c)$250.
(d)$25.
21.Backwardation, contango, and convergence are terms related to:
(a)forward contracts.
(b)futures contracts.
(c)FRAs.
(d)option contracts.
22.One of the advantages to a corporate hedger of futures contracts over forward contract is:
(a)futures contracts may not use up the same amount of a firm's debt capacity as a forward contract.
(b)futures contracts are marked to market.
(c)futures contracts require maintenance margins.
(d)futures contracts can be tailor-made to meet a firm's maturity and quantity needs.
23.An example of a financial risk product which gives the owner the right, but not the obligation, to buy an asset at a specified price is:
(a)a futures contract.
(b)a forward contract.
(c)a currency swap.
(d)a call option.
24.On November 19, 1992, January, American-style Swiss franc call options with a strike price of 70-1/2 were traded at 1.35. The person who bought these options:
(a)paid $0.0135/SF for the right to buy Swiss francs at any time through the January expiration date for $0.7050/SF.
(b)paid $0.0135/SF for the right to buy Swiss francs only on the option's expiration date for $0.7050/SF.
(c)paid $0.7050/SF for the right to buy Swiss francs through the January expiration date for $0.0135/SF.
(d)paid $0.7050/SF for the right to buy Swiss francs only on the option's expiration date for $0.0135/SF.
25.On November 19, 1992, three-month June, 1993, put options on Eurodollars with a strike price of 9600 traded for 0.19 points. A person who bought these contracts:
(a)would have been required to exercise these options and sell Eurodollar CDs regardless of Eurodollar interest rate changes through the June expiration date.
(b)would earn a profit on the transaction if Eurodollar interest rates were 8 percent in June 1993.
(c)would earn a profit on the transaction if Eurodollar interest rates were 2.50 percent in June 1993.
(d)would have been required to exercise these options and buy Eurodollar CDs regardless of Eurodollar interest rate changes through the June expiration date.