Professional Documents
Culture Documents
Derivatives and Risk Management: True/False
Derivatives and Risk Management: True/False
True/False
Easy:
(23.1) 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
a. True
b. False
a. True
b. False
a. True
b. False
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted
to a publicly accessible website, in whole or in part.
a. True
b. False
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted
to a publicly accessible website, in whole or in part.
Medium:
(23.1) Risk management CP Answer: e MEDIUM
6. Which of the following are NOT ways risk management can be used to
increase the value of a firm?
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted
to a publicly accessible website, in whole or in part.
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted
to a publicly accessible website, in whole or in part.
Medium:
(23.4) Swaps—nonalgorithmic CP Answer: b MEDIUM
11. Company A can issue floating-rate debt at LIBOR + 1%, and it can issue
fixed rate debt at 9%. Company B can issue floating-rate debt at LIBOR
+ 1.5%, and it can issue fixed-rate debt at 9.4%. Suppose A issues
floating-rate debt and B issues fixed-rate debt, after which they
engage in the following swap: A will make a fixed 7.95% payment to B,
and B will make a floating-rate payment equal to LIBOR to A. What are
the resulting net payments of A and B?
a. 6.32%
b. 6.65%
c. 7.00%
d. 7.35%
e. 7.72%
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted
to a publicly accessible website, in whole or in part.
a. 6.86%
b. 7.22%
c. 7.60%
d. 8.00%
e. 8.40%
a. -$78.00
b. -$82.00
c. -$86.00
d. -$90.00
e. -$95.00
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted
to a publicly accessible website, in whole or in part.
Given its interest rate exposure, the bank needs a strategy which is profitable whenever interest rates rise.
If designed correctly, the profits from this strategy can partially, or in some cases, completely offset the
losses the bank realizes from its basic operations whenever rates rise. Of the 5 strategies, only the short
hedge is profitable when rates rise--all the other strategies would make sense if the bank were looking for
extra profits when rates dropped.
A pays LIBOR + 1% to its lenders, receives LIBOR from B, and pays B 7.95%, for a net fixed payment of
8.95%. B pays 9.4% to its lenders, pays LIBOR to A, and receives 7.95% from A, for a net payment of
LIBOR + 1.45%.
N: 40
PV = (0.89 + .09/32) × $1,000 = -$892.8125
FV = $1,000
PMT = $30
I/YR = 3.50%
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted
to a publicly accessible website, in whole or in part.
N: 40
PV = (0.80+0.07/32) × $1,000 = -$802.1875
FV = $1,000
PMT = $30
I/YR = 4.00%
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted
to a publicly accessible website, in whole or in part.