REVIEW QUESTIONS



REVIEW HINTS MANAGING FINANCIAL RISK (FMR) AND

THE FASB’S SUMMARY OF DERIVATIVES TYPES

(Both Readings Cover the Same Topics)

CHAPTER 1

1. Financial risk is:

2. Interest-rate risk refers to:

3. Short-term interest rates:

4. The prices of long-term bonds:

5. Duration is:

6. The term structure of interest rates describes the relationship between the:

7. According to the expectations theory of the yield curve, a downward sloping yield curve means that market participants expect:

8. The term structure theory which predicts long-term interest rates will, on average, be higher than short-term interest rates is called:

9. The goal of financial engineering is to:

10. A major purpose of financial risk management is to:

CHAPTER 2

1. The forward exchange rate locked in with a forward exchange-rate contract:

2. The Eurocurrency market is:

3. The U.S. dollar forward exchange rate premium or discount on the British pound sterling is most likely to be equal to:

4. A forward exchange contract to buy German marks in 60 days can be replicated by:

5. A forward rate agreement is:

6. The contractual rate on a Norwegian FRA can be derived from:

7. With a forward exchange-rate contract, payment must be made:

CHAPTER 3

1. The settlement price of a futures contract is:

2. The process of marking futures contracts to market has the effect of:

3. Marking to market is generally thought to:

4. Price limits are most likely to be associated with:

5. Foreign-currency contracts are likely to be used to:

6. A person wanting to lock in an exchange rate for the payment of a foreign-currency obligation to someone else would:

7. Basis in futures-contract trading refers to:

8. A basic relationship in financial futures pricing is that:

CHAPTER 4

1. An option contract gives the option holder:

2. An option to sell an asset is called:

3. An option to by an asset is called:

4. A European option:

5. A call option can be replicated by:

CHAPTER 5

1. A major advantage of options over futures contracts for hedging purposes is:

2. Foreign-currency options are available:

3. An expected receipt of German marks by an American exporter can be hedged best by:

4. Using foreign-currency futures options instead of underlying foreign-currency futures contracts:

5. The writers of currency call options:

6. To set a cap on the interest rate that a company must pay for a future loan, the treasurer can:

7. The interest-rate cap that a corporate treasurer can set on a future loan is equal to the rate implied by the strike price of an interest-rate:

8. The value of an interest-rate call option will increase if:

9. The option delta is:

CHAPTER 6

1. An interest rate swap usually involves:

2. Usually, interest rate swaps are:

3. In an interest rate swap, the firm wishing floating-rate debt:

4. In an interest rate swap:

5. An interest rate swap is:

6. Swaptions are:

7. One reason interest rate swaps exist is that:

8. A currency swap is:

9. Circus swaps are:

10. In efficient markets, the value of an outstanding interest rate swap:

CHAPTER 7

1. An expected receipt of British pounds in ninety days can be fully hedged:

2. If a company uses a forward contract to fully hedge a required payment of yen in ninety days:

3. A risk management product which is similar to a cylinder is:

4. A corporate treasurer could set a cap and a floor on the interest rate for a future loan by:

5. A bank could set a cap and a floor on the interest rate it receives from a commercial loan by:

6. A corporate treasurer could convert a floating-rate loan to a synthetic fixed-rate loan by:

7. If interest rates are expected to rise:

From the FASB document entitled Summary of Derivative Types at

J:\courses\acct5341\fasb\sfas133\derivsum.doc

Be prepared for essay questions about the following:

1. Determination of Fair Value pp. 4-7

2. What is duration and why is it important? pp. 11-17

3. How are forward rates derived? pp. 19-20

4. How are yield curves derived? pp. 19-27

5. What are the types of risks in derivatives? pp. 75-76

6. Glossary terms pp. 77-81

Sometimes I ask students to provide the FAS 133 journal entries for examples given in he FASB document entitled Summary of Derivative Types at

J:\courses\acct5341\fasb\sfas133\derivsum.doc

All Possible Quiz Questions for each week are topics for examination questions.

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