Financial Risk Management - Chapter 17

"A put option on a company s stock has an exercise price of $20. On the delivery date, the stock is trading at $24 per share. What should the investor who has paid $2 for the option do? " A. Not exercise the option and lose $2 B. Not exercise the option and lose $6 C. Exercise the option and gain $2 D. Exercise the option and gain $4

A. Not exercise the option and lose $2

A company enters into a cash flow hedge to offset fluctuations in the value of foreign currency transactions occurring in two years. How should the company record the gains and/or losses on the cash flow hedge in the current year? A. The hedged gains and losses are reported in comprehensive income B. The hedged gains and losses are reported in current period income C. The hedged gains and losses are reported in current period income together with the offsetting gains and losses of the foreign currency D. The hedged gains and losses are reported in comprehensive income together with the offsetting gains and losses of the foreign currency

A. The hedged gains and losses are reported in comprehensive income

"Upon entering into an interest rate swap with a notional principal of $10,000,000, what is the initial amount of money the counterparties must exchange at the beginning of the swap? " A. $0 "B. $5,000,000 " "C. The future value of $10,000,000 " "D. $10,000,000 discounted"

A. $0

An airline wants to lock in the price of the jet fuel it needs to purchase to satisfy the peak in-season demand for travel. The airline wants to manage its exposure to fluctuations in fuel prices. What type of exposure is this? A. Translation B. Delivery C. Commodity D. Speculative

C. Commodity

XYZ Company has a well established commercial paper (CP) program that they use to fund operations. The company is expanding by purchasing a new factory. The CFO is worried about the time and expense needed to issue long-term debt and decides to use the funds they raise in the CP market to pay for the purchase of the factory. This strategy will be successful if: A. An interest rate swap is used B. A credit default swap is employed C. A commodities future is purchased D. The yield curve remains upward sloping

D. The yield curve remains upward sloping