Corporate Finance
Exam Bank
Course Introduction
Corporate Finance examines the principles and techniques used by firms to manage their financial resources and maximize shareholder value. The course covers topics such as capital budgeting, financial analysis, risk and return, cost of capital, capital structure, dividend policy, working capital management, and valuation methods. Students will learn to apply quantitative methods to real-world corporate financial decisions, evaluate the impact of financing and investment choices on firm value, and understand the role of financial markets and institutions in supporting corporate activities. This foundational course equips students with analytical tools and conceptual frameworks essential for careers in finance, consulting, or management.
Recommended Textbook
Introduction to Derivatives and Risk Management 8th Edition by Don M. Chance
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16 Chapters
781 Verified Questions
781 Flashcards
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Chapter 1: Introduction
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Sample Questions
Q1) A market in which the price equals the true economic value
A)is risk-free
B)has high expected returns
C)is organized
D)is efficient
E)all of the above
Answer: D
Q2) The absence of a daily settlement is one of the factors distinguishing a forward contract from a futures contract.
A)True
B)False
Answer: True
Q3) Derivative markets make stock and bond markets more efficient.
A)True
B)False
Answer: True
Q4) Swaps,like options,trade on organized exchanges.
A)True
B)False
Answer: False
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Chapter 2: Structure of Options Markets
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Sample Questions
Q1) An investor who exercises a call option on an index must
A)accept the cash difference between the index and the exercise price
B)purchase all of the stocks in the index in their appropriate proportions from the writer
C)immediately buy a put option to offset the call option
D)immediately write another call option to offset
E)none of the above
Answer: A
Q2) The exercise price can be set at any desired level on each of the following types of options except
A)FLEX options
B)equity options
C)over-the-counter options
D)all of the above
E)none of the above
Answer: B
Q3) The AT&T October puts are an option series.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Principles of Option Pricing
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Sample Questions
Q1) Which of the following statements about an American call is not true?
A)Its time value decreases as expiration approaches
B)Its maximum value is the stock price
C)It can be exercised prior to expiration
D)It pays dividends
E)none of the above
Answer: D
Q2) The gain from the early exercise of an American put is X(1 + r)<sup>-T</sup>S<sub>0</sub>.
A)True
B)False Answer: False
Q3) What is the time value of the January 115 call?
A)5.30
B)0.00
C)3.50
D)1.70
E)none of the above
Answer: A
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Page 5
Chapter 4: Option Pricing Models: the Binomial Model
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Sample Questions
Q1) A portfolio that combines the underlying stock and a short position in an option is called
A)a risk arbitrage portfolio
B)a hedge portfolio
C)a ratio portfolio
D)a two-state portfolio
E)none of the above
Q2) When puts are priced with the binomial model,which of the following is true?
A)the puts must be American
B)the puts cannot be properly hedged
C)the puts will violate put-call parity
D)the hedge ratio is one throughout the tree
E)none of the above
Q3) The formula for a hedge ratio of a put is the same as that of the call,except that put prices are used instead of call prices.
A)True
B)False
Q4) The binomial option pricing formula will conform to the European lower bound. A)True
B)False
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Chapter 5: Option Pricing Models: the
Black-Scholes-Merton Model
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Sample Questions
Q1) If we now assume that the stock pays a single dividend of 2.25 in three months,what stock price should we use in the model? (Due to differences in rounding your calculations may be slightly different."none of the above" should be selected only if your answer is different by more than 10 cents. )
A)17.75
B)20.75
C)20.00
D)20.80
E)none of the above
Q2) The option's sensitivity to an interest rate change is called rho.
A)True
B)False
Q3) The Black-Scholes-Merton model combined with put-call parity give the theoretical price of an American put option.
A)True
B)False
Q4) The time to expiration of an option is based on a 360-day year.
A)True
B)False
7
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Chapter 6: Basic Option Strategies
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Sample Questions
Q1) Because of the greater time value,a call writer who closes the position prior to expiration will always pay more for the call than if the position were held to expiration.
A)True
B)False
Q2) Suppose the investor constructed a covered call.At expiration the stock price is $27.What is the investor's profit?
A)$589
B)$289
C)$2,989
D)$2,711
E)none of the above
Q3) The maximum loss on a call purchase is the premium on the call.
A)True
B)False
Q4) Covered call writing should be considered a strategy to enhance the return on a stock.
A)True
B)False
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Chapter 7: Advanced Option Strategies
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Sample Questions
Q1) In a calendar spread the time value of the nearby option will decay more rapidly.
A)True
B)False
Q2) What is the maximum loss on the spread?
A)$500
B)$698
C)$198
D)$802
E)none of the above
Q3) What is the profit if the stock price at expiration is $47?
A)-$102
B)$398
C)-$302
D)$500
E)none of the above
Q4) Buying a put money spread is a bearish strategy.
A)True
B)False
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Page 9
Chapter 8: The Structure of Forward and Futures Markets
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Sample Questions
Q1) If the initial margin is $5,000,the maintenance margin is $3,500 and your balance is $4,000,how much must you deposit?
A)$6,000
B)$1,500
C)$9,000
D)nothing
E)none of the above
Q2) Which of the following is not a forward contract?
A)a long-term employment contract at a fixed salary
B)an automobile lease non-cancelable for three years
C)a rain check
D)a signed contract to buy a house in six months
E)none of the above
Q3) The daily settlement procedure is a major difference between futures contracts and forward contracts.
A)True
B)False
Q4) A limit move is when a futures price reaches its all time high or low price.
A)True
B)False
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Chapter 9: Principles of Pricing Forwards, Futures, and Options on Futures
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Sample Questions
Q1) Normal backwardation and contango are mutually exclusive conditions for a market. A)True
B)False
Q2) What is the lower bound of a European foreign currency call if the spot rate is $2.25,the domestic interest rate is 5.5 percent,the foreign interest rate is 6.2 percent,the option expires in three months,and the exercise price is $2.20?
A)$0.0457
B)$0.05
C)$0.0793
D)$0.0529
E)none of the above
Q3) Suppose you buy a futures contract at $150.If the futures price changes to $147,what is its value an instant before it is marked-to-market?
A)0
B)$3
C)-$3
D)it is impossible to tell
E)none of the above
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Chapter 10: Futures Arbitrage Strategies
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Sample Questions
Q1) Find the annualized implied repo rate on a T-bond arbitrage if the spot price is 112.25,the accrued interest is 1.35,the futures price is 114.75,the CF is 1.0125,the accrued interest at delivery is 0.95,and the holding period is three months.
A)1.85 percent
B)0.77 percent
C)14.77 percent
D)13.04 percent
E)2.23 percent
Q2) Which of the following is a form of program trading?
A)index arbitrage
B)wild card arbitrage
C)triangular arbitrage
D)timing arbitrage
E)none of the above
Q3) If a stock index futures is at 455 and the pricing model says it should be at 458,an arbitrageur should buy the futures and sell short the stock.
A)True
B)False
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Chapter 11: Forward and Futures Hedging, Spread, and Target Strategies
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Sample Questions
Q1) The risk of the basis is usually less than the risk of the spot position.
A)True
B)False
Q2) Determine the optimal hedge ratio for Treasury bonds worth $1,000,000 with a modified duration of 12.45 if the futures contract has a price of $90,000 and a modified duration of 8.5 years.
A)16.27
B)15.93
C)7.42
D)11.11
E)none of the above
Q3) Find the profit if the investor buys a July futures at 75,sells an October futures at 78 and then reverses the July futures at 72 and the October futures at 77.
A)-3
B)-2
C)2
D)1
E)none of the above
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Chapter 12: Swaps
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Sample Questions
Q1) Equity swaps can be used for all of the following except:
A)to synthetically buy stock
B)to synthetically sell stock
C)to convert dividends into capital gains
D)to synthetically re-align an equity portfolio
E)none of the above
Q2) The fixed rates on a currency swap are the same as the fixed rates on plain vanilla interest rate swaps in the respective currencies.
A)True
B)False
Q3) Interest rate swap payments are made
A)on the last day of the quarter
B)on the first day of each month
C)at whatever dates are agreed upon by the counterparties
D)on the 15th of the agreed-upon months
E)on the last day of the month
Q4) The level of the stock is irrelevant to the pricing of equity swaps.
A)True
B)False
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Chapter 13: Interest Rate Forwards and Options
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Sample Questions
Q1) Swaptions are like forward swaps in which of the following ways
A)Both are free of credit risk
B)Both require the execution of a swap at expiration
C)They have the same price
D)Both are traded on swaption exchanges
E)none of the above
Q2) Find the rate on a pure discount loan hedged with a long FRA if the loan is for $10 million and matures in 30 days,the FRA is 30-day LIBOR,the fixed rate on the FRA is 4 percent,and LIBOR at the time the loan is taken out is 5 percent.
A)4.87 percent
B)0.25 percent
C)5.18 percent
D)3.10 percent
E)2.04 percent
Q3) The advantage of a collar over a cap is
A)it lowers the out-of-pocket cost
B)it offers the possibility of greater returns
C)it eliminates the risk
D)it has lower transaction costs
E)none of the above
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Chapter 14: Advanced Derivatives and Strategies
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Sample Questions
Q1) In a weather derivative,the number of days times the average temperature above 65 degrees Fahrenheit is called
A)temperature day count
B)day-temps
C)cooling degree days
D)temp-days
E)heating degree days
Q2) The rate on a constant maturity swap is based on a U.S.Treasury security of a given maturity.
A)True
B)False
Q3) A range floater is a security with which of the following characteristics
A)the payments range from a given maximum to a given minimum
B)the maturity is limited to a fixed range
C)its payments are based on whether the rate stays within a range
D)all of the above
E)none of the above
Q4) A PO is a security promising a stream of common stock dividend payments. A)True
B)False
Page 16
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Chapter 15: Financial Risk Management Techniques and Applications
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Sample Questions
Q1) Which of the following are not methods of determining the VAR?
A)simulation method
B)historical method
C)estimation method
D)analytical method
E)none of the above
Q2) Which of the following techniques is a more appropriate risk management tool for a company in which asset value is not easily measurable?
A)stress risk
B)credit value at risk
C)market risk
D)delta at risk
E)cash flow at risk
Q3) Market risk is which of the following
A)the risk associated with failing to properly record market transactions
B)the risk that a dealer will lose market share to a competing dealer
C)the risk associated with movements in such factors as interest rates and exchange rates
D)the risk of the government declaring a transaction illegal
E)none of the above
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Chapter 16: Managing Risk in an Organization
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Sample Questions
Q1) FAS 133 defines effective hedging as
A)a hedge with no basis risk
B)a correctly priced hedge
C)a perfect hedge
D)a hedge that reduces 80 to 125 percent of the risk
E)none of the above
Q2) SEC disclosure requirements force companies to reveal how they manage all risks.
A)True
B)False
Q3) A fair value hedge is a transaction designed to protect the market value of an asset held.
A)True
B)False
Q4) Which of the following methods is not permitted to satisfy the SEC's requirements for disclosure of derivatives activity?
A)an explanation in the chairman's letter
B)a Value-at-Risk figure
C)a sensitivity analysis
D)a table of market values and related terms
E)none of the above
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