Risk Management

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Question 1

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The majority of large companies use derivatives in some way to manage their risk.

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Question 2

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Insurance is often an effective way to reduce risk when the insurance company can spread its risk over many different policies.

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Question 3

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A swap is an arrangement by two counterparties to exchange one stream of cash flows for another.

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Question 4

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A company that hedges simply passes the risk on to someone else.

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Question 5

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Unless the corporation has reason to believe that the odds are stacked in its favor,it should use derivatives for speculation,not for hedging.

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Question 6

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Futures contracts are custom-tailored forward contracts.

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Question 7

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Properly managed,hedging can be a very profitable activity.

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Question 8

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Firms use options to speculate not to reduce risk.

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Question 9

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Mexico purchased call options to lock in the price of its oil and create a base floor for its revenue stream.

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Question 10

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A firm might enter a swap contract whereby it agrees to make a series of regular payments in one currency in return for receiving a series of payments in another currency.

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Question 11

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Swap contracts can be based on either interest rates or currencies.

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Question 12

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A commodity producer can place a floor on its revenues by selling put options on the commodity.

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Question 13

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A producer that uses options to reduce downside risk is buying a "protective put."

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Question 14

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A commodity producer that uses put options to reduce the risk of a fall in commodity prices is effectively buying insurance.

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Question 15

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An oil producer would sell,rather than buy,crude oil futures to protect against falling oil prices.

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Question 16

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Futures contracts are standardized to expire on the same day each year.

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Question 17

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Buyers of financial futures place an order to buy a financial asset at a future date.

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Question 18

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Speculators are a necessary component of well-functioning futures markets.

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Question 19

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Forward contracts are marked to market.

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Question 20

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In a typical interest rate swap the two parties will exchange a series of fixed payments for a series of payments that are linked to the level of interest rates.

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