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11-1ChapterElevenHedging,Insuring,andDiversifyingThischaptercontains35multiplechoicequestions,10shortproblemsand5longerproblems.MultipleChoice1.Oneissaidto________ariskifreducingone’sexposuretoalossrequiresgivingupthepossibilityofagain,whereas________meanspayingapremiumtoavoidpossiblelosses.(a)diversify;hedging(b)insure;hedging(c)hedge;insuring(d)hedge;diversifyingAnswer:(c)2.A(n)________insurescreditorsagainstlossesstemmingfromadebtor’sfailuretomakepromisedpayments.(a)hedge(b)creditguarantee(c)option(d)assetguaranteeAnswer:(b)3.Inaforwardcontract,thepriceforimmediatedeliveryofanitemistermedthe________.(a)spotprice(b)forwardprice(c)facevalue(d)longpositionAnswer:(a)11-24.Inaforwardcontract,thepartywhocommitstosellanitemissaidtotakea________,andthepartywhocommitstobuythespecifieditemissaidtotakea________.(a)longposition;shortposition(b)shortposition,spotposition(c)shortposition;longposition(d)longposition;spotpositionAnswer:(c)5.________aretradedonorganizedexchanges.(a)Forwardcontracts(b)Futurescontracts(c)Options(d)bandcAnswer:(d)6.A(n)________isanagreementbetweentwopartiestoexchangeaseriesofcashflowsatspecifiedintervalsoveraspecifiedperiodoftime.(a)futurescontract(b)swapcontract(c)optioncontract(d)creditcontractAnswer:(b)7.Theswapcontractisequivalentto________.(a)aseriesofforwardcontracts(b)aseriesofcreditcontracts(c)aseriesofoptioncontracts(d)aseriesofdiversificationcontractsAnswer:(a)8.Forasavingsbankwithcustomerliabilitiesthatareshort-termdepositsearninganinterestratethatchangeswithmarketconditions,oneappropriatehedgingstrategymightbetorollovershort-termbonds.Thisistermed________.(a)aswapscontract(b)anoptionscontract(c)matchingassetstoliabilities(d)aninsurancecontractAnswer:(c)11-39.________arelimitsplacedoncompensationforparticularlossescoveredunderaninsurancecontract.(a)exclusions(b)caps(c)deductibles(d)copaymentsAnswer:(b)10.Lifeinsurancepoliciespaybenefitsifaninsuredpartydies,butsuchpoliciesdonotpaydeathbenefitsiftheinsuredpersontakeshisorherownlife.Thisisknownasa(n):(a)exclusion(b)cap(c)deductible(d)copaymentAnswer:(a)11.________createincentivesforinsuredpartiestocontroltheirlosses,andrepresenttheamountofmoneytheinsuredpartymustpayoutofhisorherownresourcesbeforereceivinganycompensationfromtheinsurer.(a)exclusions(b)caps(c)deductibles(d)loanguaranteesAnswer:(c)12.________meansthattheinsuredpartymustcoverafractionoftheloss.(a)exclusions(b)caps(c)copayments(d)loanguaranteesAnswer:(c)11-413.A(n)________isacontractthatobligestheguarantortomakethepromisedpaymentonaloaniftheborrowerfailstodoso.(a)exclusion(b)loanguarantee(c)copayment(d)interest-ratecapAnswer:(b)14.Aninterestrateinsurancepolicywhichguaranteesamaximuminterestrateisknownas,ortakestheformof________.(a)loanguarantee(b)interest-rateguarantee(c)interest-ratefloor(d)interest-ratecapAnswer:(d)15.________protectagainstlossesfromadeclineinstockprices.(a)Expirationoptions(b)Calloptions(c)Putoptions(d)StrikeoptionsAnswer:(c)16.The________isthefixedpricespecifiedinanoptioncontract.(a)strikeprice(b)exerciseprice(c)spotprice(d)aandbAnswer:(d)17.A(n)________istheright,butnottheobligation,tobuyorsellsomethingatanexercisepriceinthefuture.(a)forwardcontract(b)option(c)swap(d)deductibleAnswer:(b)11-518.A(n)________canbeexercisedontheexpirationdateonly,whereasa(n)________canbeexercisedatanytimeuptoandincludingtheexpirationdate.(a)American-typeoption;European-typeoption(b)European-typeoption;American-typeoption(c)European-typeoption;Asian-typeoption(d)American-typeoption;Asian-typeoptionAnswer:(b)19.YouaretheChiefFinancialOfficerofasoybeanoilcompany.Inyourjobyoureceivedozensofdifferentproposalseachmonthregardingwaystohedgethecompany’sexposuretofallingsoybeanoilprices.Howdoyoudecideamongthedifferentproposals?(a)Choosethehedgewiththebestinvestmentbankparticipating.(b)Choosethehedgethatachievesthedesiredreductioninriskthroughthebestinsurancepolicy.(c)Choosethehedgethatminimizesthecostofachievingthedesiredreductioninrisk.(d)noneoftheaboveAnswer:(c)20.Whichofthefollowingarewaystoavoidlossesthroughinsuring?(a)Lockinafifteenhundreddollarfareforaholidayairfare.(b)Agreetopurchaseanapartmentinsixmonthsforthreehundredthousanddollars.(c)Asasoybeangrower,enterintoaforwardcontracttosellyoursoybeansatafixedpriceinamonth.(d)noneoftheaboveAnswer:(d)21.Whichofthefollowingarewaystoavoidlossesthroughhedging?(a)Payapremiumforhealthcarecoverage.(b)Purchaseaputoptiononastockyoudoown.(c)Payforacreditguaranteeonaloanyouareworriedaboutcollecting.(d)Enterintoaswaptoexchangeaseriesofcashflowsatspecifiedintervalsoveraspecifiedperiodoftime.Answer:(d)11-622.Whichofthefollowingarewaystoavoidlossesthroughinsuring?(a)Payapremiumforhealthcarecoverage(b)Purchaseaputoptiononastockyoudoown(c)Bothaandb(d)NeitheranorbAnswer:(c)Questions23-25refertothefollowinginformation:Anoldcollegefriendofyourinvestsincocoafuturesandoptionscontracts.Hehastoldyouthathebelievescocoapricesareescalating.Youdecidetogoaheadandpurchaseacalloptiononcocoawithastrikepriceof$0.80perpound.Thatway,ifcocoapricesgoup,youcanexerci