Derivatives and Risk Management
CHAPTER 24
DERIVATIVES AND RISK MANAGEMENT
Please see the preface for information on the AACSB letter indicators (F, M, etc.) on the subject lines.
True/False
Easy:
(24.1) Risk management FP 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
(24.4) Swaps FP Answer: b EASY
2. Interest rate swaps allow a firm to exchange fixed for floating-rate payments, but a swap cannot reduce actual net interest expenses.
a. True
b. False
(24.5) Speculative versus pure risk FP 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
(24.6) Risk management FP 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:
(24.6) Futures market hedging FP 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
Multiple Choice: Conceptual
Medium:
(24.1) Risk management CP Answer: d 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 help a firm maintain its optimal capital budget.
b. Risk management can reduce the expected costs of financial distress.
c. Risk management can help firms minimize taxes.
d. Risk management can allow managers to defer receipt of their bonuses and thus postpone tax payments.
e. Risk management can increase debt capacity.
(24.1) Interest rate and reinvestment rate risk CP Answer: a MEDIUM
7. Which of the following statements about
DERIVATIVES AND RISK MANAGEMENT
Please see the preface for information on the AACSB letter indicators (F, M, etc.) on the subject lines.
True/False
Easy:
(24.1) Risk management FP 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
(24.4) Swaps FP Answer: b EASY
2. Interest rate swaps allow a firm to exchange fixed for floating-rate payments, but a swap cannot reduce actual net interest expenses.
a. True
b. False
(24.5) Speculative versus pure risk FP 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
(24.6) Risk management FP 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:
(24.6) Futures market hedging FP 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
Multiple Choice: Conceptual
Medium:
(24.1) Risk management CP Answer: d 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 help a firm maintain its optimal capital budget.
b. Risk management can reduce the expected costs of financial distress.
c. Risk management can help firms minimize taxes.
d. Risk management can allow managers to defer receipt of their bonuses and thus postpone tax payments.
e. Risk management can increase debt capacity.
(24.1) Interest rate and reinvestment rate risk CP Answer: a MEDIUM
7. Which of the following statements about