Corporate Finance
Mock Exam
Course Introduction
Corporate Finance explores the fundamental principles and practices governing financial management in corporations. The course covers key topics such as capital budgeting, cost of capital, capital structure, dividend policy, risk and return, and valuation of financial assets. Students gain insight into financial analysis and planning, investment decision-making, and how firms raise and allocate financial resources to maximize shareholder value. Case studies and real-world applications emphasize the strategic importance of financial decisions in both domestic and global markets.
Recommended Textbook
Introduction to Derivatives and Risk Management 9th Edition by Don M. Chance
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16 Chapters
945 Verified Questions
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) Which of the following contracts obligates a buyer to buy or sell something at a later date?
A) call
B) futures
C) cap
D) put
E) swaption
Answer: B
Q2) Uncertainty of future sales and cost of inputs are examples of financial risks businesses may face.
A)True
B)False
Answer: False
Q3) 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
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Chapter 2: Structure of Options Markets
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Sample Questions
Q1) An investor who is long an over-the-counter call option is exposed to the risk that the call writer will default on her obligations should the call option end up in-the-money.
A)True
B)False
Answer: True
Q2) In which city did organized option markets originate?
A) New York
B) Chicago
C) Philadelphia
D) San Francisco
E) none of the above
Answer: B
Q3) An order that specifies a maximum price to pay if buying is a
A) stop order
B) market order
C) limit order
D) all or none order
E) none of the above
Answer: C
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Page 4
Chapter 3: Principles of Option Pricing
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Sample Questions
Q1) If an option portfolio generates a zero cash flow at expiration and a positive cash flow today, an arbitrage opportunity is available.
A)True
B)False
Answer: True
Q2) The difference between two American put options with different strike prices is less than or equal to the dollar difference between the strike prices, the higher strike price minus the lower strike price.
A)True
B)False
Answer: True
Q3) Even if there are no dividends on the stock, American put-call parity will not be the same as European put-call parity.
A)True
B)False
Answer: True
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Chapter 4: Option Pricing Models: The Binomial Model
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Sample Questions
Q1) What is the hedge ratio if the stock goes down one period?
A) 0.00
B) 0.0725
C) 1.00
D) 0.73
E) none of the above
Q2) Which of the following are not path-dependent options when the stock pays a constant dividend yield?
A) European calls and European puts
B) European calls and American puts
C) American puts and European puts
D) American puts and European calls
E) none of the above
Q3) Over a large number of periods, the up and down parameters move closer to 1.5 and 0.5, respectively.
A)True
B)False
Q4) The hedge ratio is the number of shares per call in a risk-free portfolio.
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 the stock price is 44, the exercise price is 40, the put price is 1.54, and the Black-Scholes-Merton price using 0.28 as the volatility is 1.11, the implied volatility will be
A) higher than 0.28
B) lower than 0.28
C) 0.28
D) lower than the risk-free rate
E) none of the above
Q2) Which of the following variables in the Black-Scholes-Merton option pricing model is the most difficult to obtain?
A) the volatility
B) the risk-free rate
C) the stock price
D) the time to expiration
E) the exercise price
Q3) The historical volatility is the same value as the implied volatility.
A)True
B)False
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Page 7
Chapter 6: Basic Option Strategies
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Sample Questions
Q1) Consider the following statement related to buying a put option. For a given stock price, the ____________ the position is held, the more time value it loses and the ___________ the profit; however, an exception can occur when the stock price is ___________. Identify the correct words for these two blanks.
A) longer, lower, low
B) longer, higher, high
C) shorter, lower, low
D) shorter, higher, high
E) longer, flatter, low
Q2) A synthetic long call position can be created with which of the following sets of transactions.
A) borrow the present value of the strike price, sell stock, sell put
B) lend the present value of the strike price, sell stock, buy put
C) sell put, buy stock, lend the present value of the strike price
D) buy stock, buy put, borrow the present value of the strike price
E) none of the above creates a synthetic long call position
Q3) The breakeven for a protective put is the same as that for a covered call.
A)True
B)False
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Page 8
Chapter 7: Advanced Option Strategies
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Sample Questions
Q1) The profit from a zero-cost collar option strategy when the terminal stock price ends up in between the two strike prices is S<sub>T</sub> - S<sub>0</sub> where X<sub>2</sub> > X<sub>1</sub>.
A)True
B)False
Q2) What is the breakeven point?
A) $48.02
B) $41.98
C) $55.66
D) $50.00
E) none of the above
Q3) What is the profit if the stock price at expiration is at $64.75?
A) -$971
B) $1,475
C) -$3,525
D) $500
E) none of the above
Q4) There are three breakeven stock prices in a butterfly spread.
A)True
B)False
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Chapter 8: Structure of Forward and Futures Markets
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Sample Questions
Q1) Options on futures have been trading since
A) 1973
B) 1982
C) 1966
D) 1936
E) none of the above
Q2) Where did the U.S. futures market originate?
A) Chicago
B) Kansas
C) New York
D) Minneapolis
E) none of the above
Q3) Credit risk is handled in forward markets by daily marking-to-market.
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
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Chapter 9: Principles of Pricing Forwards, Futures and Options on Futures
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Sample Questions
Q1) In financial futures markets, contango means that long-term interest rates are less than short-term interest rates.
A)True
B)False
Q2) Suppose you buy a one-year forward contract at $65. At expiration, the spot price is $73. The risk-free rate is 10 percent. What is the value of the contract at expiration?
A) $8.00
B) -$8.00
C) $0.00
D) $7.27
E) none of the above
Q3) The Black formula prices an option on an instrument with a positive cost of carry.
A)True
B)False
Q4) Interest-rate parity is a cost-of-carry model.
A)True
B)False
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Chapter 10: Futures Arbitrage Strategies
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Sample Questions
Q1) Suppose you observe the spot euro at $1.50/ , the U. S. risk-free interest rate of 3.25% (continuously compounded), and the six month futures price of $1.50/ . Identify the correct implied European risk-free interst rate (select the closest answer).
A) -3.25%
B) -1.0%
C) 0.0%
D) 1.0%
E) 3.25%
Q2) The opportunity to lock in the invoice price and purchase the deliverable Treasury bond later is called
A) bond insurance
B) program trading
C) the wild card
D) delivery arbitrage
E) none of the above
Q3) Fed fund futures arbitrage is based on the assumption that LIBOR and Fed funds are perfect substitutes.
A)True
B)False
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Page 12
Chapter 11: Forward and Futures Hedging, Spread, and Target Strategies
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Sample Questions
Q1) The price sensitivity hedge ratio uses the durations of the spot and futures positions.
A)True
B)False
Q2) Find the profit if the investor enters an intramarket spread transaction by selling a September futures at $4.5, buys an December futures at $7.5 and then reverses the September futures at $5.5 and the December futures at $9.5.
A) -3
B) -2
C) 2
D) 1
E) none of the above
Q3) Which of the following is not a reason for firms to hedge?
A) Firms can hedge less expensively than can their shareholders
B) Shareholders cannot tolerate mark-to-market losses
C) Hedging by corporations can have tax advantages
D) Shareholders are not always aware of their firms' risks
E) none of the above
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Page 13
Chapter 12: Swaps
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Sample Questions
Q1) 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
Q2) For a currency swap with $10 million notional amount, the notional amount in British pounds if the exchange rate is $1.55 is (approximately)
A) 11.55 million
B) 15.5 million
C) 10 million
D) 6.45 million
E) none of the above
Q3) Swap payments are always either fixed or floating but never both.
A)True
B)False
Q4) Since 1998, the gross market value of currency swaps outstanding has always increased each year.
A)True
B)False
Page 14
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Chapter 13: Interest Rate Forwards and Options
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Sample Questions
Q1) The Black model's accuracy in pricing interest rate options is greatest when the options have short maturities.
A)True
B)False
Q2) All of the following are uses of swaptions except
A) to speculate on interest rates
B) to give a firm flexibility in future borrowings
C) to borrow money
D) to create callable from non-callable bonds
E) none of the above
Q3) Suppose your firm invested in a callable bond recently when interest rates were high and the bond has three more years to go before the first call date. If interest rates are expected to fall over the next three years, which of the following is one potential strategy would take advantage of this view.
A) buy a payer swaption
B) sell a payer swaption
C) buy a receiver swaption*
D) sell a receiver swaption
E) buy an interest rate floor
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Page 15
Chapter 14: Advanced Derivatives and Strategies
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Sample Questions
Q1) Which of the following is a path-independent option
A) a fixed strike Asian call option
B) a standard European call option
C) an up-and-out call option
D) an American put option
E) none of the above
Q2) The number of possible final average prices in an Asian option for a four period binomial model is
A) 8
B) 4
C) 16
D) 32
E) none of the above
Q3) Range floaters pay interest only if a specified interest rate falls outside of a given range.
A)True
B)False
Q4) An option to buy an option is called a compound option.
A)True
B)False
Page 16
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Chapter 15: Financial Risk Management Techniques and Appplications
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Sample Questions
Q1) Operational risk is more difficult to manage than market risk and credit risk.
A)True
B)False
Q2) Stress testing allows a firm to see how its portfolio will behave under extremely rare but favorable conditions.
A)True
B)False
Q3) Conditional Value at Risk is the expected loss, given that a loss occurs.
A)True
B)False
Q4) A delta-hedged position is one in which the A) combined spot and derivatives positions have a delta of one.
B) spot position has a delta of zero.
C) derivatives position has a delta of zero.
D) combined spot and derivatives positions have a delta of zero.
E) combined spot and derivatives positions have a gamma of zero.
Q5) A delta and gamma hedge is one in which the combined spot and derivatives positions have a delta of zero and a gamma of zero.
A)True
B)False
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Chapter 16: Managing Risk in an Organization
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Sample Questions
Q1) Ultimate authority for risk management lies with A) legal counsel
B) the head trader
C) senior management
D) the internal auditors
E) the external auditors
Q2) Metalgesellschaft lost about $1.3 billion doing what?
A) hedging short-term commitments with long-term options
B) using crude oil futures options to hedge crude oil futures
C) trading futures spreads on crude oil
D) hedging fixed rate oil price commitments with swaptions
E) none of the above
Q3) End users typically invest more resources in their derivatives operations than do dealers.
A)True
B)False
Q4) The purpose of IAS 39 is to prescribe standards for derivatives accounting for foreign currency transactions.
A)True
B)False
Page 18
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