REVIEW HINTS MANAGING FINANCIAL RISK (FMR) AND
THE FASB’S SUMMARY OF DERIVATIVES TYPES
(Both Readings Cover the Same Topics)
CHAPTER 1
1.
Financial risk is:
2.
Interest-rate risk refers to:
3.
Short-term interest rates:
4.
The prices of long-term bonds:
5.
Duration is:
6.
The term structure of interest rates describes the relationship between the:
7.
According to the expectations theory of the yield curve, a downward sloping yield curve means that
market participants expect:
8.
The term structure theory which predicts long-term interest rates will, on average, be higher than
short-term interest rates is called:
9.
The goal of financial engineering is to:
10.
A major purpose of financial risk management is to:
CHAPTER 2
1.
The forward exchange rate locked in with a forward exchange-rate contract:
2.
The Eurocurrency market is:
3.
The U.S. dollar forward exchange rate premium or discount on the British pound sterling is most
likely to be equal to:
4.
A forward exchange contract to buy German marks in 60 days can be replicated by:
5.
A forward rate agreement is:
6.
The contractual rate on a Norwegian FRA can be derived from:
7.
With a forward exchange-rate contract, payment must be made:
CHAPTER 3
1.
The settlement price of a futures contract is:
2.
The process of marking futures contracts to market has the effect of:
3.
Marking to market is generally thought to:
4.
Price limits are most likely to be associated with:
5.
Foreign-currency contracts are likely to be used to:
6.
A person wanting to lock in an exchange rate for the payment of a foreign-currency obligation to
someone else would:
7.
Basis in futures-contract trading refers to:
8.
A basic relationship in financial futures pricing is that:
CHAPTER 4
1.
An option contract gives the option holder:
2.
An option to sell an asset is called:
3.
An option to by an asset is called:
4.
A European option:
5.
A call option can be replicated by:
CHAPTER 5
1.
A major advantage of options over futures contracts for hedging purposes is:
2.
Foreign-currency options are available:
3.
An expected receipt of German marks by an American exporter can be hedged best by:
4.
Using foreign-currency futures options instead of underlying foreign-currency futures contracts:
5.
The writers of currency call options:
6.
To set a cap on the interest rate that a company must pay for a future loan, the treasurer can:
7.
The interest-rate cap that a corporate treasurer can set on a future loan is equal to the rate implied by
the strike price of an interest-rate:
8.
The value of an interest-rate call option will increase if:
9.
The option delta is:
CHAPTER 6
1.
An interest rate swap usually involves:
2.
Usually, interest rate swaps are:
3.
In an interest rate swap, the firm wishing floating-rate debt:
4.
In an interest rate swap:
5.
An interest rate swap is:
6.
Swaptions are:
7.
One reason interest rate swaps exist is that:
8.
A currency swap is:
9.
Circus swaps are:
10.
In efficient markets, the value of an outstanding interest rate swap:
CHAPTER 7
1.
An expected receipt of British pounds in ninety days can be fully hedged:
2.
If a company uses a forward contract to fully hedge a required payment of yen in ninety days:
3.
A risk management product which is similar to a cylinder is:
4.
A corporate treasurer could set a cap and a floor on the interest rate for a future loan by:
5.
A bank could set a cap and a floor on the interest rate it receives from a commercial loan by:
6.
A corporate treasurer could convert a floating-rate loan to a synthetic fixed-rate loan by:
7.
If interest rates are expected to rise:
From the FASB document entitled Summary of Derivative Types at
J:\courses\acct5341\fasb\sfas133\derivsum.doc
Be prepared for essay questions about the following:
1.
2.
3.
4.
5.
6.
Determination of Fair Value pp. 4-7
What is duration and why is it important? pp. 11-17
How are forward rates derived? pp. 19-20
How are yield curves derived? pp. 19-27
What are the types of risks in derivatives? pp. 75-76
Glossary terms pp. 77-81
Sometimes I ask students to provide the FAS 133 journal entries for examples given in he FASB document
entitled Summary of Derivative Types at
J:\courses\acct5341\fasb\sfas133\derivsum.doc
All Possible Quiz Questions for each week are topics for examination questions.