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Introduction to Derivatives and Risk Management Chance 9th
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5. The International Monetary Market is:
a. an OTC market where money market instruments trade
b. a part of the World Bank that lends funds to developing countries
c. a division of the Chicago Mercantile Exchange created for trading foreign currency futures
d. a London-based market for interbank lending
e. None of these answers are correct.
ANS: C DIF: Easy REF: 1.2 TOP: Financial Innovation
MSC: Factual

6. In the United States, the Great Moderation refers to:

a. a 15-year-long period that began around 1900 during which the growth of real output
fluctuated, inflation declined, stock market volatility was reduced, and business cycles
were moderated
b. the time period between 1920 and 1933 when sale, manufacture, and transportation of
alcohol was prohibited
c. a time period that began in 1955 and lasted for nearly a decade during which business
cycle fluctuations declined and inflation was under control
d. a time period that began after World War II and lasted for nearly a decade during the
growth of real output fluctuated, inflation declined, stock market volatility was reduced,
and business cycles were moderated
e. a time period that began during the mid-1980s and lasted a little over two decades during
which the growth of real output fluctuated, inflation declined, stock market volatility was
reduced, and business cycles were moderated
ANS: E DIF: Easy REF: 1.2 TOP: Financial Innovation
MSC: Factual

7. Nobel Prize–winning economist Ronald Coase’s view is:

a. arbitrage is the adhesive that holds financial markets together
b. derivatives destroy financial markets via excessive speculation
c. derivatives improve social welfare through better risk allocation in the economy
d. firms often appear when they can lower transaction costs
e. regulations and taxes cause financial innovation
ANS: D DIF: Easy REF: 1.2 TOP: Financial Innovation
MSC: Factual

8. The following was NOT an example cited by Nobel laureate economist Merton Miller in support of his
view that “regulations and taxes cause financial innovation”:
a. Eurobonds
b. Eurodollars
c. futures contracts
d. swaps
e. zero-coupon bonds
ANS: C DIF: Easy REF: 1.2 TOP: Financial Innovation
MSC: Factual

9. In financial markets, a coupon refers to:

a. the detachable part of a stock that entitles the holder to get dividends from the company
b. the interest paid on a bond on a regular basis, typically semiannually
c. one side of a financial swap that entitles the holder to net payments
d. the discount from the principal amount at which a zero-coupon bond is sold in the market
 e. a paper on whose submission a trader gets a reduction in brokerage fees
ANS: B DIF: Moderate REF: 1.3 TOP: Traded Derivative Securities
MSC: Factual

10. Who has described derivatives as “time bombs, both for the parties that deal in them and the economic
system”?
a. Warren Buffett
b. Ronald Coase
c. Alan Greenspan
d. Peter Lynch
e. Merton Miller
ANS: A DIF: Easy REF: 1.3 TOP: Traded Derivative Securities
MSC: Factual

11. Which of the following statements is INCORRECT?

a. Derivatives trade in zero net supply markets.
b. A derivatives trade is a zero-sum game in the absence of market imperfections like
transaction costs.
c. Derivatives are powerful financial tools that can be used for speculation as well as
hedging.
d. Derivatives have a history of always causing significant losses to any trader who trades
these contracts.
e. Derivatives can help traders to reduce price risk from economic activities.
ANS: D DIF: Moderate REF: 1.3 TOP: Traded Derivative Securities
MSC: Factual

12. Suppose regulators cap the maximum interest one can charge at 5 percent. Let the underlying market
interest rate be 8 percent. Charging anything lower will drive you out of business.
You devise a compensatory balance scheme: for every $100 that the customer borrows, she
will have to keep a certain amount with you as a compensatory balance. What should the amount of
the loan and the compensatory balance be if the customer wants to borrow $5,000?
a. $5,000 loan and $1,000 as compensatory balance
b. $5,000 loan and $1,500 as compensatory balance
c. $5,000 loan and $3,000 as compensatory balance
d. $8,000 loan and $3,000 as compensatory balance
e. $8,000 loan and $5,000 as compensatory balance
ANS: D DIF: Difficult REF: 1.3 TOP: Traded Derivative Securities
MSC: Applied

13. The Basel Committee’s Risk Management Guidelines for Derivatives (July 1994) did NOT list which
of the following risks?
a. credit risk
b. legal risk
c. liquidity risk
d. market risk
e. value-at-risk
ANS: E DIF: Easy REF: 1.5
TOP: The Regulator’s Classification of Risk MSC: Factual

14. Which of the following risks can be very difficult to hedge?

 a. credit risk
b. legal risk
c. market risk
d. operations risk
e. portfolio risk
ANS: D DIF: Easy REF: 1.7
TOP: Corporate Financial Risk Management MSC: Factual

15. Procter & Gamble’s balance sheet suggests that which of the following is NOT a characteristic of the
company’s risk exposure or risk management practice?
a. P&G is exposed to currency risk, interest rate risk, and commodity price risk.
b. P&G consolidates currency risk, interest rate risk, and commodity price risk, and tries to
naturally offset them. It then tries to hedge the residual risk with derivatives.
c. P&G holds some derivatives for trading purposes and trades them strategically to
maximize shareholder value.
d. P&G monitors derivative positions using techniques including market value, sensitivity
analysis, and value-at-risk.
e. P&G uses interest rate swaps to hedge its underlying debt obligations and enters into
certain currency interest rate swaps to hedge the company’s foreign net investments.
ANS: C DIF: Moderate REF: 1.7
TOP: Corporate Financial Risk Management MSC: Factual

16. Procter & Gamble’s balance sheet suggests that which of the following is NOT a characteristic of the
company’s risk exposure or risk management practice?
a. P&G manufactures and sells its products in many countries. It mainly uses forwards and
options to reduce the risk that the company’s financial position will be adversely affected
by short-term changes in exchange rates.
b. P&G uses futures, options, and swaps to manage price volatility of raw materials.
c. P&G designates a security as a hedge of a specific underlying exposure and monitors its
effectiveness in an ongoing manner.
d. P&G is exposed to significant volatility from commodity hedging activity and credit risk
exposure.
e. P&G grants stock options and restricted stock awards to key managers and directors.
ANS: D DIF: Moderate REF: 1.7
TOP: Corporate Financial Risk Management MSC: Factual
Other documents randomly have
different content
 Plate 244
INTERIOR OF THE TOWER OF THE INFANTAS, UPPER PART
Plate 245
BALCONY OF THE “CAPTIVE” (ISABEL DE SOLIS), OVERLOOKING THE VEGA, OR
PLAIN, OF GRANADA
 Plate 246
ALCOVE OF THE “CAPTIVE” (ISABEL DE SOLIS)
 Plate 247
INTERIOR OF THE TOWER OF THE “CAPTIVE” (ISABEL DE SOLIS)
 Plate 248
THE “CAPTIVE’S” TOWER FROM THE ENTRANCE
 Plate 249
INTERIOR OF THE MOSQUE
ROOM IN THE “CAPTIVE’S” TOWER
 Plate 250

HALL OF JUSTICE BATHS, THE CHAMBER OF REPOSE

 Plate 251
BALCONY OF THE FAVOURITE, “LINDARAJA”
Plate 252
ALCOVE IN THE “LINDARAJA” APARTMENTS
Plate 253
GARDEN OF “LINDARAJA,” AND THE APARTMENTS TRADITIONALLY SAID TO HAVE
BEEN OCCUPIED BY “LINDARAJA” A FAVOURITE SULTANA
 Plate 254
DETAIL, INTERIOR OF THE BALCONY OF “LINDARAJA”
 Plate 255
DETAIL, LOWER PART OF THE BALCONY OF “LINDARAJA”
 Plate 256
DETAIL OF THE CENTRAL PART OF THE BALCONY OF “LINDARAJA”
 Plate 257
THE QUEEN’S BOUDOIR AND DISTANT VIEW OF THE GENERALIFE
 Plate 258
THE QUEEN’S BOUDOIR AND VIEW OF THE GENERALIFE
 Plate 259
THE QUEEN’S BOUDOIR AND OLD ALBAICIN QUARTER
 Plate 260
THE QUEEN’S BOUDOIR AND DEFILE OF THE DARRO
 Plate 261
LINDARAJA’S GARDEN AND THE APARTMENTS IN WHICH WASHINGTON IRVING
STAYED
 Plate 262
ANGLE OF THE BALCONY OF LINDARAJA
 Plate 263
BALCONY OF THE FAVOURITE LINDARAJA
 Plate 264
INTERIOR OF THE TOWER OF THE CAPTIVE, ISABEL DE SOLIS
 Plate 265
EXTERIOR OF THE CAPTIVE’S TOWER
 Plate 266
THE TOWER OF THE CAPTIVE, ISABEL DE SOLIS