Corporate Finance
Exam Solutions
Course Introduction
Corporate Finance explores the fundamental concepts and analytical tools necessary for sound financial decision-making in corporations. The course covers topics such as capital budgeting, risk and return, valuation of financial assets, corporate capital structure, funding strategies, cost of capital, and dividend policy. Students will develop the ability to assess investment opportunities, analyze financial statements, understand the implications of financial decisions, and apply quantitative techniques to real-world corporate finance scenarios. The course equips students with the knowledge and skills crucial for careers in finance, investment banking, consulting, and corporate 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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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) Cash markets are also known as
A)speculative markets
B)spot markets
C)derivative markets
D)dollar markets
E)none of the above
Answer: B
Q2) Investors who do not consider risk in their decisions are said to be
A)speculating
B)short selling
C)risk neutral
D)traders
E)none of the above Answer: C
Q3) Arbitrage is a transaction designed to capture profits resulting from market efficiency.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Structure of Options Markets
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Sample Questions
Q1) Which one of the following is not a type of transaction cost in options trading?
A)the bid-ask spread
B)the commission
C)clearing fees
D)the cost of obtaining a quote
E)all of the above
Answer: D
Q2) Which of the following index options is the most widely traded?
A)S&P 500
B)Nikkei 225
C)Technology Index
D)New York Stock Exchange Index
E)none of the above
Answer: A
Q3) Exercise prices are set in $5 increments for options on exchanges.
A)True
B)False
Answer: False
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Chapter 3: Principles of Option Pricing
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Sample Questions
Q1) Put-call parity is a relationship that can be used to provide the price of both a European put and call simultaneously.
A)True
B)False
Answer: False
Q2) An option can be priced at less than zero because it can potentially generate a large profit for its owner.
A)True
B)False
Answer: False
Q3) An American call should be exercised early when the stock price is extremely high and is expected to fall.
A)True
B)False
Answer: False
Q4) At expiration the call price must converge to the stock price.
A)True
B)False
Answer: False
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Chapter 4: Option Pricing Models: the Binomial Model
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Sample Questions
Q1) Over a large number of periods,the up and down parameters move closer to 1.5 and 0.5,respectively.
A)True
B)False
Q2) 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
Q3) Options that can be priced by considering only the payoffs at expiration are called path-independent.
A)True
B)False
Q4) The binomial model assumes that investors are risk neutral.
A)True
B)False
Q5) A riskless hedge involving stock and puts requires a long position in stock and a short position in puts.
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) Which of the following statements is true about the relationship between the option price and the risk-free rate?
A)a call price is nearly linear with respect to the risk-free rate
B)a call price is highly sensitive to the risk-free rate
C)the risk-free rate affects a call but not a put
D)the risk-free rate does not affect a call price
E)none of the above
Q2) The call's vega is: (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 0.05. )
A)-3.02
B)0.046
C)-0.792
D)4.67
E)none of the above
Q3) An approximate implied volatility for an at-the-money call can be solved directly.
A)True
B)False
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Chapter 6: Basic Option Strategies
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Sample Questions
Q1) Which of the following statements about a covered call writing strategy is true?
A)the losses are limited
B)return and risk are greater than that of simply holding the stock
C)it is a cheaper form of insurance than a protective put
D)it generally makes a large number of small profits
E)none of the above
Q2) Each of the following is a bullish strategy except
A)a long call
B)a short put
C)a short stock
D)a protective put
E)none of the above
Q3) Suppose the buyer of the call in problem 1 sold the call two months before expiration when the stock price was $33.How much profit would the buyer make?
A)$32.89
B)$30.11
C)$78.00
D)$11.00
E)none of the above
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Page 8
Chapter 7: Advanced Option Strategies
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Sample Questions
Q1) A call money spread that is closed prior to expiration has lower losses but higher profits for each stock price than if held to expiration.
A)True
B)False
Q2) A box spread is a combination of a call bull spread and a put bear spread.
A)True
B)False
Q3) What is the breakeven point?
A)$48.02
B)$41.98
C)$55.66
D)$50.00
E)none of the above
Q4) Which of the following transactions can have an unlimited loss?
A)long straddle
B)calendar spread
C)butterfly spread
D)reverse box spread
E)none of the above
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Chapter 8: The Structure of Forward and Futures Markets
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Sample Questions
Q1) Stock index futures contracts are terminated by delivery the portfolio of stocks represented by the index.
A)True
B)False
Q2) A limit move is when a futures price reaches its all time high or low price.
A)True
B)False
Q3) There are no futures contracts on the Dow Jones Industrial Average.
A)True
B)False
Q4) Many futures contracts specify that there are several grades of a commodity that are acceptable for delivery.
A)True
B)False
Q5) Futures trades are executed in the pit.
A)True
B)False
Q6) Credit risk is handled in forward markets by daily marking-to-market.
A)True
B)False
Page 10
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Chapter 9: Principles of Pricing Forwards, Futures, and Options on Futures
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Sample Questions
Q1) A convenience yield is an explanation for a negative cost of carry.
A)True
B)False
Q2) Interest rate parity is essentially the same as
A)the cross-rate relationship
B)the cost of carry relationship
C)the Garman-Kohlhagen model
D)all of the above
E)none of the above
Q3) 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
Q4) The daily settlement brings the value of a futures contract back to zero.
A)True
B)False
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Chapter 10: Futures Arbitrage Strategies
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Sample Questions
Q1) Determine the annualized implied repo rate on a Treasury bond spread in which the March is bought at 98.7 and the June is sold at 99.5.The March CF is 1.225 and the June CF is 1.24.The accrued interest as of March 1 is 0.75 and the accrued interest as of June 1 is 1.22.
A)5.21 percent
B)10.03 percent
C)1.28 percent
D)2.42 percent
E)0.81 percent
Q2) The timing option will lead to early delivery if the coupon rate is higher than the repo rate.
A)True
B)False
Q3) Much of the volume of stock transactions in program trading occurs through the New York Stock Exchange's DOT system.
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 minimum variance hedge ratio uses current information while the price sensitivity hedge ratio uses past information.
A)True
B)False
Q2) Though a cross hedge has somewhat higher risk than an ordinary hedge,it will reduce risk if which of the following occurs?
A)futures prices are more volatile than spot prices
B)the spot and futures contracts are correctly priced at the onset
C)spot and futures prices are positively correlated
D)futures prices are less volatile than spot prices
E)none of the above
Q3) 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
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Chapter 12: Swaps
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Sample Questions
Q1) Which of the following statements about diff swaps is true?
A)they involve interest payments in separate currencies
B)they are based on the difference between interest rates in two countries
C)they are based on the difference between interest rates of different maturities
D)the notional principal reduces throughout the life of the swap
E)the notional principal increases throughout the life of the swap
Q2) Interest rate swap volume is greater than currency swap volume because virtually ever business is exposed to interest rate risk.
A)True
B)False
Q3) A swap involving two floating rates is called a basis swap.
A)True
B)False
Q4) Currency swap volume is greater than equity swap volume.
A)True
B)False
Q5) The value of a floating-rate bond is par on each interest payment date.
A)True
B)False
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Chapter 13: Interest Rate Forwards and Options
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Sample Questions
Q1) Find the payoff of an interest rate call option on the annual rate with an exercise rate of 10 percent if the one-period rate at expiration is 11 percent.(No days/360 adjustment is necessary and assume a $1 notional principal. )
A)0.12
B)zero
C)0.01
D)0.0090
E)none of the above
Q2) FRAs,and caps and floors are guaranteed against default.
A)True
B)False
Q3) Which of the following is a limitation of using the Black model to price interest rate options?
A)the risk-free rate is not constant
B)the volatility is not constant
C)interest rates are not lognormally distributed
D)all of the above
E)none of the above
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15
Chapter 14: Advanced Derivatives and Strategies
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Sample Questions
Q1) Equity-linked debt is equivalent to a zero coupon bond and a given number of call options.
A)True
B)False
Q2) Which of the following statements is correct about cash-or-nothing options
A)they are subject to no credit risk
B)they must be priced by the binomial model
C)they have lower upside gains and lower downside losses than ordinary options
D)they are equivalent to short positions in asset-or-nothing options
E)none of the above
Q3) A contingent-pay option is replicated by which of the following combinations?
A)long an ordinary call and long an ordinary put
B)long an ordinary call and short a cash-or-nothing call
C)long an ordinary call and short an asset-or-nothing call
D)long an ordinary call and long an equity forward
E)long an ordinary call and long a risk-free bond
Q4) Because a chooser option enables the holder to end up with either a put or a call,it is equivalent to a straddle.
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 is approximately the Value at Risk at 5 percent of a portfolio of $10 million of asset A,whose expected return is 15 percent and volatility is 35 percent,and $15 million of asset B,whose expected return is 21 percent and volatility is 30 percent,where the correlation between the two assets is 0.2.
A)$5.6 million
B)$10 million
C)$15 million
D)$1.25 million
E)none of the above
Q2) Operational risk is more difficult to manage than market risk and credit risk.
A)True B)False
Q3) Conditional Value at Risk is the expected loss,given that a loss occurs. A)True
B)False
Q4) The credit risk in an interest rate swap is smallest at the beginning and at the end of the life of the swap.
A)True
B)False
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Chapter 16: Managing Risk in an Organization
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Sample Questions
Q1) Orange County lost $1.6 billion doing what?
A)betting that interest rates would remain stable
B)buying Treasury bond futures
C)selling Eurodollar futures
D)buying short- and intermediate-term bonds on margin
E)trading money market options
Q2) Procter and Gamble lost $157 million doing what?
A)speculating on a worldwide recession
B)failure to hedge their borrowing cost on a bond issue
C)speculating on foreign interest and exchange rates
D)speculating on a decrease in the federal budget deficit
E)mismanagement of a hedge fund in their pension fund
Q3) SEC disclosure requirements force companies to reveal how they manage all risks. A)True
B)False
Q4) Senior management should evaluate trading performance on a risk-adjusted basis.
A)True
B)False
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