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CHAPTER23RiskManagement:AnIntroductiontoFinancialEngineeringI.DEFINITIONSHEDGINGa1._____istheprocessofreducingafirm’sexposuretopriceorratefluctuations.a.Hedgingb.Volatilityc.Diversificationd.Valueminimizatione.TranslationDERIVATIVESECURITYb2.Afinancialassetthatrepresentsaclaimtoanotherfinancialassetiscalleda(n):a.initialpublicoffering.b.derivativesecurity.c.seasonedequityoffering.d.Eurobond.e.subjugated(orjunior)stock.RISKPROFILEc3.Aplotshowinghowthevalueofafirmisaffectedbychangesinpricesorratesiscalleda:a.securitymarketline.b.netpresentvalueprofile.c.riskprofile.d.scatterplot.e.returngrid.TRANSACTIONSEXPOSUREd4.Short-runfinancialriskarisingfromtheneedtobuyorsellatuncertainpricesorratesinthenearfutureiscalled:a.riskmaximization.b.volatilitymaximization.c.economicexposure.d.transactionsexposure.e.translationexposure.ECONOMICEXPOSUREc5.Long-termfinancialriskarisingfrompermanentchangesinpricesorothereconomicfundamentalsiscalled:a.riskmaximization.b.volatilitymaximization.c.economicexposure.d.transactionsexposure.e.translationexposure.CHAPTER23FORWARDCONTRACTa6.A(n)_____contractisalegallybindingagreementbetweentwopartiescallingforthesaleofanassetorproductinthefutureatapriceagreedupontoday.a.forwardb.spotc.swapd.optione.floatingPAYOFFPROFILEb7.Aplotshowingthegainsandlossesthatwilloccuronacontractastheresultofunexpectedpricechangesiscalleda:a.riskprofile.b.payoffprofile.c.securitymarketline.d.scatterplot.e.normaldistribution.FUTURESCONTRACTe8.Aforwardcontractwiththefeaturethatgainsandlossesarerealizedeachdayratherthanonlyonthesettlementdate,iscalleda(n)_____contract.a.floatingb.spotc.optiond.swape.futuresCROSS-HEDGINGd9.Hedginganassetwithcontractswrittenonacloselyrelated,butnotidentical,assetiscalled:a.primarytrading.b.opentrading.c.open-hedging.d.cross-hedging.e.perfect-hedging.SWAPCONTRACTe10.Anagreementbytwopartiestoexchangespecifiedcashflowsatspecifiedintervalsinthefutureiscalleda(n)_____contract.a.floatingb.spotc.optiond.futurese.swapCHAPTER23OPTIONCONTRACTa11.Anagreementthatgivestheownertheright,butnottheobligation,tobuyorsellaspecificassetataspecificpriceforasetperiodoftimeiscalleda(n)_____contract.a.optionb.forwardc.futuresd.swape.spotCALLOPTIONb12.Anoptionthatgivestheownertheright,butnottheobligation,tobuyanassetiscalleda_____option.a.parityb.callc.putd.straddlee.stranglePUTOPTIONc13.Anoptionthatgivestheownertheright,butnottheobligation,tosellanassetiscalleda_____option.a.parityb.callc.putd.straddlee.strangleINTERESTRATECAPd14.Acalloptiononaninterestrateiscalledaninterestrate:a.spread.b.swap.c.collar.d.cap.e.floor.INTERESTRATEFLOORe15.Aputoptiononaninterestrateiscalledaninterestrate:a.spread.b.swap.c.collar.d.cap.e.floor.CHAPTER23II.CONCEPTSINTERESTRATEVOLATILITYa16.Interestratevolatility:I.affectstheborrowingcostsofafirm.II.hasdecreasedintheU.S.since1979becauseofapolicychangebytheFederalReserve.III.createsaneedforfinancialengineering.IV.decreasesuncertaintyaboutthefuture.a.IandIIIonlyb.IIandIVonlyc.IIandIIIonlyd.I,II,andIIIonlye.I,III,andIVonlyINTERESTRATEVOLATILITYb17.Astrongargumentcanbemadethatthecollapseofthesavingsandloanindustrybeganwhen:a.theinflationratesintheU.S.beganrisingrapidly.b.thevolatilityofinterestratesincreasedsignificantly.c.fluctuatingcommoditypricesbecamethenorm.d.theBrettonWoodsaccordbecameeffective.e.theFederalReservebegancontrollingthemarketrateofinterest.EXCHANGERATEVOLATILITYc18.ThebreakdownoftheBrettonWoodsaccordcaused_____volatilitytoincrease.a.interestrateb.inflationratec.exchangerated.commoditypricee.optionpriceDERIVATIVESUSAGEe19.Accordingtothesectioninthetextbookentitled“CharlesW.SmithsononWhoUsesWhat”,thetwoprimaryreasonsfirmsutilizederivativesecuritiesistomanage_____and_____exposures.a.inflationrate;interestrateb.foreignexchangerate;stockmarketc.profitmargin;inflationrated.commodityprice;stockmarkete.interestrate;foreignexchangerateFINANCIALRISKMANAGEMENTd20.Thegoaloffinancialriskmanagementasitrelatestohedgingisto:a.increaseriskwiththehopeofearninghigherreturns.b.totallyeliminateallformsofrisk.c.totallyeliminatefinancialrisk.d.reducerisktoatolerablelevel.e.increasethesteepnessoftheriskprofile.CHAPTER23FINANCIALRISKMANAGEMENTc21.Acombinationbetweenwhichtwoofthefollowingfirmsismostapttoreduceeachfirm’sfinancialriskexposure?a.citrusgrowerwithanothercitrusgrowerb.oilproducerwithanotheroilproducerc.clothingmanufacturerwithacottonfarmerd.cerealmakerwithacottonfarmere.ashirtmanufacturerwithapantsmanufacturerSHORT-RUNFINANCIALRISKc22.Whichofthefollowingstatementsarecorrectconcerningafirm’sshort-runfinancialrisk?I.Naturaldisastersareonecauseofshort-runfinancialrisk.II.Afinanciallysoundfirmcanbecomefinanciallydistressedastheresultoftheirshort-runexposuretofinancialrisk.III.Eachsegmentofabusinessshouldberesponsibleforhedgingtheirdivision’sshort-runfinancialrisk.IV.Businessownerscannotreduce,eitherdirectlyorindirectly,theirshort-runexposuretochangesintheircashflows.a.IandIIIonlyb.IIandIVonlyc.IandIIonlyd.I,II,andIIIonlye.I,II,III,andIVLONG-RUNFINANCIALRISKd23.Long-runfinancialrisk: