TEST BANK Chapter 18 Intro to Risk Management and Derivates with Answers PDF

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Viney Chapter 18 Introduction to Risk Management and Derivatives with Solutions. 200048 Financial Institutions and Markets online quiz help....

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Chapter 18: An Introduction to Risk Management and Derivatives 1. It is argued that effective risk management is vital to the survival of an organisation because: A. most business organisations are exposed to a wide variety of risks B. many business failures can be attributed to inadequate policies C. most organisations are exposed to interest rate risk D. All of the given answers. 2. Derivatives are the financial instruments that are: A. financial assets, such as shares and bonds that derive their value from the value of the company that issues them B. financial assets whose rates of return must be derived from information published in financial pages C. financial assets that derive their value from underlying assets D. derived by investment banks, which then trade them 3. Risk management objectives and polices should be established by: A. the chief executive officer B. the chief financial officer C. the board of directors D. a company's shareholders

4. Risk exposures that may impact on the normal day-to-day running of a business are called: A. transaction al B. operation al C. financi al D. function al 5. When an oil company suffers severe damage to one of its oil drilling platforms, this is an example of: A. technological risk B. financial risk C. business risk D. operational risk 6. Major financial risk exposures for corporations include a: A. change in interest rates B. foreign currency appreciating C. company with insufficient funds to pay wages D. All of the given answers. 7. Which of the following is NOT an example of financial risk exposure for a company? A. When interest rates increase and a larger proportion of mortgage payments are in default for a bank. B. When a local currency decreases for an exporter. C. When a company has taken out a short-term loan and floating interest rates increase. D. When interest rates increase for a highly geared company.

8. The risk exposure when a corporation appears to have insufficient funds to meet dayto day commitments as they fall due is known as: A. transaction risk B. liquidity risk C. interest rate risk D. default risk 9. Derivative markets exist in order to: A. allow for the direct cash sale of common shares B. allow for the direct cash sale of corporate bonds C. reduce the risk of exposure to price fluctuations in cash markets D. overcome some of the information problems involved in trades in over-thecounter markets 10. For a company the process of risk management needs to: A. cover financial and operational risks only B. cover business and operational risks only C. be a structured process D. be flexible as the nature of risk is dynamic 11. An important first step in a risk management strategy for a company is to: A. establish related risk and product controls B. analyse the impact of the risk exposure C. select appropriate risk management strategies D. continually monitor the existing strategies

12. Which of the following statements is FALSE? A. Part of a company's credit policy considers how much credit a customer should be granted. B. Cost-benefit analysis can be used to evaluate an investment of a back-up computer centre or outsource the back-up to an outside centre provider. C. After identification of all of its risk exposure an organisation must seek to remove all these risks. D. Procedural controls of a risk management strategy documents all the products that can be used by the organisation. 13. Which of the following regarding initial margins is FALSE? A. A futures trader is required to pay an initial margin to the clearinghouse. B. The initial margin will be higher for low market volatility. C. If the futures contract price drops below the minimum percentage, the initial margin will have to be increased. D. In order to top up an insufficient initial margin a maintenance margin call will be made. 14. If a client is holding a large number of listed shares on the ASX, intends to sell in three months' time and wishes to protect the value of the share portfolio, she may: A. buy a futures contract based on the S&P/ASX B. sell a futures contract based on the S&P/ASX C. write a put option based on the S&P/ASX D. buy a call option based on the S&P/ASX 15. A futures contract is an agreement that specifies the delivery of a commodity or financial security at a: A. predetermined future date, with a price to be negotiated at the time of delivery B. predetermined future date, with a currently agreedon price C. currently agreed-on price, with a delivery date to be negotiated later D. predetermined future date, with a price and delivery to be negotiated later

16. A standardised agreement traded on an organised exchange for delivery of a specified security or commodity at a specified price on a predetermined date is a/an: A. hedging contract B. futures contract C. option contract D. swap contract 17. Futures contracts are traded: A. face –to face by market participants B. electronically by the SFE C. over –the counter by dealers D. over –the counter by commodity and security brokers 18. Which of the following statements relating to the use of futures contracts is INCORRECT? A. Futures contracts are derivative products that derive from a physical market product. B. The pricing of futures contracts is based on the price of the underlying market product. C. Future physical market price changes are offset by a profit or loss in the futures market. D. Futures contracts are generally closed out by delivery of the physical market product. 19. If a futures contract is marked-to-market, this refers to the: A. interaction of the demand and supply forces in the market to determine the price of the options contract B. interaction of the demand and supply forces in the market to determine the price of the futures contract C. settlement of gains and losses on futures contracts on a daily basis D. settlement of gains and losses on forward contracts on a daily basis

20. A maintenance margin call refers to: A. funds paid to the clearing house by the brokers as insurance against losses B. funds paid to the clearing house by each trader to cover losses C. realised profits paid by the clearing house to traders D. the difference between the futures contracts price and the underlying asset 21. A company, worried that the cost of funds might rise during the term of their shortterm borrowing, can hedge this rise by: A. buying futures contracts on bankaccepted bills B. selling futures contracts on bankaccepted bills C. buying bank-accepted bills on the spot market D. increasing the amount of money that has been borrowed 22. If a company intends to borrow in three months' time, it can lock in its borrowing costs by: A. buying futures contracts B. selling futures contracts C. going long on futures contracts D. an arbitrage position on futures contracts

23. A forward rate agreement (FRA) is an interest rate risk-management product, generally provided by banks over the-counter. Which of the following statements regarding forward rate agreements is correct? A. FRAs are not standardised with regard to contract period and amount. B. The centralised clearing house (CCH) holds the deposits and margin calls. C. As a bank is the counterparty to the FRA, there is no credit risk. D. All of the given answers. 24. If an FRA dealer quotes '6Mv9M 7.25 to 20', this means that the dealer is prepared to: A. lend three-month money at 7.05% per annum B. borrow three-month money at 7.05% per annum C. lend three-month money at 7.25% per annum D. borrow three-month money at 7.25% per annum 25. An option buyer: A. has a greater insurance benefit than the purchaser of a futures contract B. will generally incur a lower cost than will a purchaser of a futures contract C. is purchasing a very risky instrument if they don't own the underlying asset as they are locked in to buying at expiration D. carries the risk of unfavourable price movements 26. For the writer of a put option, if the underlying share price: A. moves above the strike price the potential profits are unlimited B. drops below the strike price the potential profits are unlimited C. moves above the strike price, the potential profits are limited to the premium D. moves above the strike price, the premium is reduced by the difference

27. A swap is: A. another name for a call option B. another name for a put option C. an agreement between two or more persons to exchange cash flows over some future period D. the name for the exchange of a futures contract for an option contract 28. When two parties exchange the respective interest payments associated with existing debt borrowed in the capital markets, this is called a/an: A. interest exchange B. financial switch C. swa p D. financial transfer 29. An agreement between two parties to exchange a series of cash flows similar to those resulting from an exchange of different types of bonds is called a/an: A. credit swap B. interest rate swap C. yield curve swap D. notional spread 30. The growth of the swaps market has been due to firms wanting to: A. lower the cost of funds B. hedge interest rate risk C. lock in profit margins D. All of the given answers.

31. The board of directors of a company is responsible for the implementation and monitoring of risk management strategies. True

False

32. For a corporation, external risk management strategies include leading and lagging FX transactions. True

False

33. A government introducing legislation requiring carbon-emitting companies to lower their carbon emissions is an example of operational risk. True

False

34. A commercial bank has to consider in its risk management procedures not only interest rate risk but also credit risk and liquidity risk. True

False

35. An analysis of the costs associated with establishing and maintaining a particular risk management strategy versus the risk management benefits to be obtained is called a SMART analysis. True

False

36. As risks for a company vary over time a flexible and robust risk management strategy is essential for an organisation no matter how large or small. True

False

37. The prime function of a futures clearing house is to bring together the buyer and seller in each futures contract. True

False

38. The maintenance margin call refers to the difference between the futures market price and the futures contract. True

False

39. A FRA expressed as 3Mv5M means the settlement date is in three months and the interest cover is for a five-month period. True

False

40. An American put option is worth more than a European put option as it can be advantageous to exercise an American put option before expiry. True

False

41. What is operational risk in relation to an organisation?

42. What is financial risk in relation to an organisation?

43. In relation to risk management for an organisation, discuss the procedures of identification and analysis of risk exposures.

44. In relation to risk management for an organisation, discuss the issue of acceptable risks and the appropriate management of such risks.

45. Given the ever-changing business environment, discuss how this fits with risk management.

Chapter 18: An Introduction to Risk Management and Derivatives Key 1.

It is argued that effective risk management is vital to the survival of an organisation because: A. most business organisations are exposed to a wide variety of risks B. many business failures can be attributed to inadequate policies C. most organisations are exposed to interest rate risk D. All of the given answers. Difficulty: Easy Viney - Chapter 18 #1 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY

2.

Derivatives are the financial instruments that are: A. financial assets, such as shares and bonds that derive their value from the value of the company that issues them B. financial assets whose rates of return must be derived from information published in financial pages C. financial assets that derive their value from underlying assets D. derived by investment banks, which then trade them Difficulty: Easy Viney - Chapter 18 #2 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY

3.

Risk management objectives and polices should be established by: A. the chief executive officer B. the chief financial officer C. the board of directors D. a company's shareholders Difficulty: Easy Viney - Chapter 18 #3 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY

4.

Risk exposures that may impact on the normal day-to-day running of a business are called: A. transaction al B. operation al C. financi al D. function al Difficulty: Easy Viney - Chapter 18 #4 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY

5.

When an oil company suffers severe damage to one of its oil drilling platforms, this is an example of: A. technological risk B. financial risk C. business risk D. operational risk Difficulty: Easy Viney - Chapter 18 #5 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY

6.

Major financial risk exposures for corporations include a: A. change in interest rates B. foreign currency appreciating C. company with insufficient funds to pay wages D. All of the given answers. Difficulty: Easy Viney - Chapter 18 #6 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY

7.

Which of the following is NOT an example of financial risk exposure for a company? A. When interest rates increase and a larger proportion of mortgage payments are in default for a bank. B. When a local currency decreases for an exporter. C. When a company has taken out a short-term loan and floating interest rates increase. D. When interest rates increase for a highly geared company. Difficulty: Easy Viney - Chapter 18 #7 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY

8.

The risk exposure when a corporation appears to have insufficient funds to meet day-to day commitments as they fall due is known as: A. transaction risk B. liquidity risk C. interest rate risk D. default risk Difficulty: Medium Viney - Chapter 18 #8 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY

9.

Derivative markets exist in order to: A. allow for the direct cash sale of common shares B. allow for the direct cash sale of corporate bonds C. reduce the risk of exposure to price fluctuations in cash markets D. overcome some of the information problems involved in trades in over-thecounter markets Difficulty: Easy Viney - Chapter 18 #9 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY

10.

For a company the process of risk management needs to: A. cover financial and operational risks only B. cover business and operational risks only C. be a structured process D. be flexible as the nature of risk is dynamic Difficulty: Easy Viney - Chapter 18 #10 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY

11.

An important first step in a risk management strategy for a company is to: A. establish related risk and product controls B. analyse the impact of the risk exposure C. select appropriate risk management strategies D. continually monitor the existing strategies Difficulty: Medium Viney - Chapter 18 #11 learning goal: EMPTY

learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY

12.

Which of the following statements is FALSE? A. Part of a company's credit policy considers how much credit a customer should be granted. B. Cost-benefit analysis can be used to evaluate an investment of a back-up computer centre or outsource the back-up to an outside centre provider. C. After identification of all of its risk exposure an organisation must seek to remove all these risks. D. Procedural controls of a risk management strategy documents all the products that can be used by the organisation. Difficulty: Medium Viney - Chapter 18 #12 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY

13.

Which of the following regarding initial margins is FALSE? A. A futures trader is required to pay an initial margin to the clearinghouse. B. The initial margin will be higher for low market volatility. C. If the futures contract price drops below the minimum percentage, the initial margin will have to be increased. D. In order to top up an insufficient initial margin a maintenance margin call will be made. Difficulty: Easy Viney - Chapter 18 #13 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY

14.

If a client is holding a large number of listed shares on the ASX, intends to sell in three months' time and wishes to protect the value of the share portfolio, she may: A. buy a futures contract based on the S&P/ASX B. sell a futures contract based on the S&P/ASX C. write a put option based on the S&P/ASX D. buy a call option based on the S&P/ASX Difficulty: Medium Viney - Chapter 18 #14 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY

15.

A futures contract is an agreement that specifies the delivery of a commodity or financial security at a: A. predetermined future date, with a price to be negotiated at the time of delivery B. predetermined future date, with a currently agreedon price C. currently agreed-on price, with a delivery date to be negotiated later D. predetermined future date, with a price and delivery to be negotiated later Difficulty: Easy Viney - Chapter 18 #15 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY

16.

A standardised agreement traded on an organised exchange for delivery of a specified security or commodity at a specified price on a predetermined date is a/an: A. hedging contract B. futures contract C. option contract D. swap contract Difficulty: Easy Viney - Chapter 18 #16 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY

17.

Futures contracts are traded: A. face –to face by market participants B. electronically by the SFE C. over –the counter by dealers D. over –the counter by commodity and security brokers Difficulty: Easy Viney - Chapter 18 #17 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY

18.

Which of the following statements relating to the use of futures contracts is INCORRECT? A. Futures contracts are derivative products that derive from a physical market product. B. The pricing of futures contracts is based on the price of the underlying market product. C. Future physical market price changes are offset by a profit or loss in the futures market. D. Futures contracts are generally closed out by delivery of the physical market product. Difficulty: Easy Viney - Chapter 18 #18 learning goal: EMPTY learning objective: EMPTY level: EMPTY lo: EMPTY question type: EMPTY source: EMPTY type: EMPTY

19.

If a futures contract is marked-to-market, this refers to the: A. interaction of the demand and supply forces in the market to determine the price...