1.

Rising interest rates lower CONTRACT

PRICE RATES and thus decrease the
value of T-notes futures contracts.
Answer: False; BOND PRICES
2. The futures and options markets
permit EFFICIENCY in the timing of
financial transactions. Answer: False;
FLEXIBILITY
3. The firm MUST ALWAYS BE PROTECTED
against changes that occur between
the time a decision is reached and the
time the transaction is completed.
Answer: False; CAN BE PROTECTED, AT
LEAST PARTIALLY
4. When two parties have mirror-image
risks, they can enter into a transaction
that TRANSFERS risks. Answer: False;
ELIMINATES
5. An assumption made by Fischer Black
and Myron Scholes in deriving the
option pricing model is that the call
option can only be exercised at any
time within the option period. (FALSE,
only on its expiration date)
6. In long hedges, futures contracts are
sold in anticipation of price increases.
(FALSE, bought)
7. It is a debt obligation derived from
another debt obligation (a. Swap b.
Structured Note c. Inverse Floaters
ANS:B)
8. Finding another firm with mirror-image
needs is necessary before a swap
transaction can be completed (FALSE,
not necessary)
9. The price of an option depends on
three factors: option's time after
expiration, variability of the stock
price and the risk free rate. -False
(option's time until expiration)
10.All option pricing models are based on
______. -Riskless hedge
11.If a firm needs to guard against an
increase in exchange rates, firms may
use short hedges or sell futures
contract. -False ( interest rates)
12.In many instances, it might be better
for the company to self-insure, which
means paying another party to bear it
rather bearing the risk directly. -False

(bearing the risk directly rather than

paying another party to bear it.)
13.A company has a fluctuating cash flow
so it would be better for the company
to have a stable debt rate (FALSE,
Varied rate)
14.A structured note that is backed by
the interest and principal payments on
mortgages are called collateralized
debt obligations (FALSE, CMO)
15.When the stock price is highly volatile,
there is only a small chance of a large
gain (FALSE, stock price is stable)
16.The calculated exercise value of a call
option could not be negative (FALSE, it
could be negative, but realistically, its
true value is zero)
17.Black-Scholes Option Pricing Model is
based on the general premise
developed on Binomial Option Pricing
Model which is the blank. - Creation of
a riskless portfolio
18.Black-Scholes OPM is widely used by
option writers. (true or false) - False.
Option traders
19.What backs the zero with the shortest
maturity? - First interest payment on
the T-bond issue
20.Discount rate will fall if rates drop, this
usually implies an decrease in the PO's
value. (true or false) - Increase in the
IO's value
21.Most larger firms have designated
risk managers who report to the
CEO, while the CEOs of smaller firms
personally assume risk management
responsibilities. (FALSE: CFO)
22.Hedging
allows
managers
to
concentrate on running their core
businesses without having to worry
about interest rate, currency and
commodity price variability. (TRUE)
23.A company has a fluctuating cash
flows so it would be better for the
company to have a stable debt rate.
( False - VARIED RATE)
24.A structured note that is backed by the
interest and principal payments on
mortgages are called collateralized
debt obligatiins. (False - CMO)

25.When the stock price is highly volatile,

there is only a small chance of a large
gain. (False - stock price is stable)
26.The calculated exercise value of a call
option could not be negative. (False - it
could be negative but realistically, it's
"true" value is zero)
27.If the exercise price increases, the
value
of
the
option
_______.
-DECREASES

28.Option prices in general, are not very

sensitive to interest rate changes.
-TRUE
29.The holder of _______ never knows
when his or her bond will be called.
CMO
30.Ending option value can be negative.
-FALSE