Quick Quiz 1

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1		Hedging is best defined as __________.
			A)	eliminating the risk associated with price changes
			B)	using financial assets that represent a claim on other assets
			C)	managing short-run financial exposure due to fundamental changes in the economy
			D)	managing long-term financial risk due to uncertain prices or interest rates
			E)	reducing exposure to price or rate fluctuations
2		Transactions exposure __________.
			A)	reduces exposure to price or rate fluctuations
			B)	include financial assets that represent a claim on other assets
			C)	is short-run financial exposure due to uncertain prices or interest rates
			D)	is long-term financial risk due to fundamental changes in the economy
			E)	is exposure to brokerage fees and commissions when buying hedging instruments
3		A put option is __________.
			A)	a legally binding agreement to sell an asset for a specified price on a specified future date
			B)	the right, but not the obligation, to purchase an asset for a specified price by a specified date in the future
			C)	an agreement to sell an asset for a specified price on a specified date with gains and losses recognized daily
			D)	an arrangement to exchange cash flows within the next two days
			E)	the right, but not the obligation, to sell an asset for a specified price on or before a specified date in the future
4		Your company raises cattle. Which of the following contracts would allow you to lock in a sale price for your cattle? I. sell a futures contract on cattle II. buy a futures contract on cattle III. buy a futures put option on cattle IV. sell a futures put option on cattle
			A)	I only
			B)	II only
			C)	I or IV only
			D)	I or III only.
			E)	II or III only
5		At one time, exchange rates were more or less fixed at specified levels by the __________.
			A)	NAFTA
			B)	Securities Exchange Act
			C)	Bretton Woods Accord
			D)	Foreign Exchange Act
			E)	Global Exchange Agreement
6		The long term financial risk arising from permanent changes in prices and other fundamentals is called __________ exposure.
			A)	transactions
			B)	ancillary
			C)	derivatives
			D)	economic
			E)	commodity

Use the following information to answer the next three questions.
Suppose you observed the following quotations at the end of business on May 12, 2001.

Orange Juice (CTN) 15,000lbs.; cents per lb.
Mth	Open	High	Low	Settle	Change	Lifetime High	Lifetime Low	Open Interest
Jul01	74.90	82.30	74.90	82.20	+6.80	128.50	73.00	17,832
Sep01	77.50	83.00	77.50	83.00	+5.00	121.30	77.10	6,379
Nov01	80.50	85.75	80.50	85.75	+5.00	113.25	79.80	3,149
Jan02	83.50	88.00	83.00	88.50	+5.00	119.75	82.75	1,397

7		Suppose you are interested in purchasing the September futures contract. Based on the quote, what is the futures price of 15,000 lbs of orange juice for delivery in September?
			A)	$11,625
			B)	$12,330
			C)	$12,450
			D)	$13,863
			E)	$13,275
8		What was the lowest contract price at which 15,000 lbs. of orange juice for delivery in July traded on the day quoted?
			A)	$11,235
			B)	$11,625
			C)	$12,330
			D)	$12,075
			E)	$12,345
9		Suppose that yesterday you purchased one July futures contract at the settle price. At the end of the day today, your contract is worth __________. (Ignore margin considerations.)
			A)	$750 less than yesterday
			B)	$1,020 less than yesterday
			C)	$750 more than yesterday
			D)	$1,020 more than yesterday
			E)	$147,000 more than yesterday
10		You think the price of GM stock is going to rise. In order to make money, you could __________. I. buy a call option on GM stock. II. sell a call option on GM stock. III. buy a put option on GM stock. IV. sell a put option on GM stock. V. buy shares of GM stock.
			A)	I only.
			B)	I and IV only.
			C)	II and III only.
			D)	V only.
			E)	I, IV, and V only.