Q&A Hero

Q: Interest rate swaps: A) are a group of option contracts with varying expiration dates. B) are rarely used by U.S. business firms. C) can involve exchanging one floating-rate loan for another floating-rate loan. D) require two firms to have access to loans with equivalent terms. E) are all based on the U.S. T-bill index.

Q: Which one of the following statements related to swaps is correct? A) Brokerage firms are the dominant swap dealers in the U.S. B) Swaps can be custom tailored to a firm's needs. C) As of 2017, all swaps are traded on a single organized exchange. D) Swaps contracts are limited to interest rates. E) Swap contracts are limited to a single payment at expiration.

Q: Browning Enterprises currently has all fixed-rate debt. The firm would like to convert part of this to floating-rate debt. Which one of the following will accomplish this for the firm? A) Option on floating-rate bonds B) Forward contract on U.S. Treasury bills C) Interest rate swap D) Currency swap E) Interest rate call option

Q: A U.S. bank has an agreement with a German bank to exchange $500,000 for 397,000 on the first day of each of the next three calendar quarters. This agreement is best described as a: A) floating exchange. B) spot trade. C) currency option. D) futures contract. E) swap contract.

Q: Southern Groves raises tangerines. To hedge its risk, the firm trades in the orange futures market. This process is known as: A) secondary trading. B) open trading. C) open-hedging. D) cross-hedging. E) perfect-hedging.

Q: By definition, which one of the following contracts is marked to the market on a daily basis? A) Forward contract B) Spot contract C) Option contract D) Swap E) Futures contract

Q: The futures contract on silver is based on 5,000 troy ounces and is priced in dollars and cents per troy ounce. Assume today's report reflects these prices for the June contract: Open 19.435, High 19.450, Low 19.025, Settle 19.119, and Chg .369. What was the highest price per troy ounce for the silver futures contract on this day? A) $19.435 B) $19.450 C) $19.819 D) $19.025 E) $19.119

Q: The futures contract on silver is based on 5,000 troy ounces and is priced in dollars and cents per troy ounce. Assume today's report reflects these prices for the June contract: Open 19.435, High 19.450, Low 19.025, Settle 19.119, and Chg .369. What is the price per troy ounce that will be used for today's marking-to-market for this contract? A) $19.435 B) $19.450 C) $19.025 D) $19.081 E) $19.119

Q: All of the following are futures exchanges except: A) CBT. B) CME. C) LIFFE. D) NYSE. E) NYMEX.

Q: Futures contracts: A) are identical to forward contracts except for the size of the contract. B) provide an option to purchase an asset at a specified price on the settlement date. C) are marked to the market on a daily basis which helps eliminate credit risk. D) are less popular in organized trading then are forward contracts. E) are limited to contracts on financial assets.

Q: This morning a national bakery agreed to pay a farmer $7.10 a bushel for 5,000 bushels of wheat that the farmer will deliver to the bakery four months from now. Payment will be made at the time of delivery. What is this legally binding agreement called? A) Forward contract B) Spot contract C) Swap D) Call option contract E) Put option contract

Q: Assume you are looking at a payoff profile for a forward contract on oil. Which one of these statements correctly describes what you are seeing? A) From the buyer's perspective, the payoff profile is downward sloping. B) From both the buyer's and the seller's perspectives, the payoff profile is upward sloping. C) The vertical axis depicts changes in the price of oil. D) From the seller's perspective, the payoff profile is downward sloping. E) The horizontal axis represents the changes in contract value.

Q: Which one of the following is true regarding forward contracts? A) The upfront costs to enter a forward contract can be significant. B) If a buyer of a forward contract earns a $200 profit, then the seller will also profit by $200. C) The buyer wins when market prices are less than the forward price. D) The payoff profile for the buyer of a forward contract is an upward sloping linear function. E) If the seller of a forward contract earns a profit, then the buyer has neither a profit nor a loss.

Q: A forward contract: A) requires that payment be made in full when the contract is originated. B) provides the buyer with an option to buy an asset on the settlement date at the forward price. C) is a binding agreement on both the buyer and the seller and nets out as a zero sum game. D) is marked to the market daily at the seller's request. E) allows for immediate delivery at an agreed upon price which is to be paid on the settlement date.

Q: Which one of these statements related to forward contracts is correct? A) The buyer of a forward contract on corn benefits if the price of corn increases during the contract period. B) The buyer of a forward contract has the right, but not the obligation, to execute the contract any time up to and including the settlement date. C) Forward contracts cannot be sold but must be executed by the original parties to the contract. D) Forward contracts recognize profits and losses on a daily basis. E) The price at which a forward contract closes is set equal to the closing spot price on the settlement date.

Q: The seller of a forward contract: A) is obligated to make delivery and accept the forward price. B) has the option of making delivery and receiving the greater of the spot price or the contract price. C) has the option of either making delivery or accepting delivery. D) is obligated to take delivery and pays the lower of the spot market price or the contract price. E) is obligated to take delivery and pay the forward price.

Q: By hedging short-term financial risk, a firm can: A) ensure a steady rate of return for its shareholders. B) eliminate price changes over the long-term. C) ensure its own economic viability. D) gain time to adapt to changing market conditions. E) eliminate its exposure to price increases in raw materials.

Q: Long-run financial risk: A) can frequently be hedged on a permanent basis. B) is best hedged on a division by division basis within a conglomerate. C) is related more to near-term transactions than to advancements in technology. D) generally results from changes in the underlying economics of a business. E) can generally be hedged such that the financial viability of a firm is protected.

Q: Which one of the following statements is correct in relation to a firm's short-run financial risk? A) Short-run financial risk results from permanent changes in prices due to new technology. B) A financially sound firm can become financially distressed as the result of its short-run exposure to financial risk. C) Each segment of a business entity should be responsible for hedging its own short-run financial risk. D) Short-run financial risk is defined as changes resulting from fundamental shifts in the underlying economics of a business. E) Thus far, hedging techniques have been unsuccessful in reducing short-run financial risk.

Q: A hedge between which two of the following firms is most apt to reduce each firm's financial risk exposure? A) Wheat farmer and bakery B) Oil producer and coal miner C) Wheat grower and pharmaceutical firm D) Pastry bakery and cotton farmer E) Shoe manufacturer and coat manufacturer

Q: Which one of the following can a firm do if it effectively manages its financial risks? A) Eliminate all of the risks faced by the firm B) Totally eliminate all financial risks C) Reduce the price volatility the firm faces D) Guarantee the firm's financial success E) Avoid all long-term financial risks

Q: For years, your family has operated a business that produces lawn mowers. Over the years, the industry has progressed and new mass production techniques have been developed. However, your firm cannot afford this new technology, nor can you compete against those firms that can. Thus, the family has decided to close its facility at the end of the year. Which one of the following describes the risks to which your family's firm succumbed? A) Forward risk B) Volatility exposure C) Economic exposure D) Transactions exposure E) Translation risk

Q: Farmer Ted planted 200 acres in wheat this year. The weather has been perfect and he expects to harvest a record crop within the next two weeks. At present, he has no storage facilities and therefore must sell his crop as soon as it is harvested. Which one of the following risks is he facing because he must sell his crop at whatever the market price is at harvest time? A) Futures risk B) Volatility exposure C) Economic exposure D) Transactions exposure E) Translation exposure

Q: Farmer Mac owns a large orange grove in Florida. The value of his business is directly related to the price of oranges. Which one of the following is a graphical representation of this price-value relationship? A) Exchange line B) Net present value profile C) Risk profile D) Market line E) Return grid

Q: The value of a stock option is dependent upon the value of the underlying stock. Thus, a stock option is a: A) forward agreement. B) derivative security. C) mezzanine asset. D) contingent security. E) junior security.

Q: Farmer Jones raises several hundred acres of corn and would suffer a significant loss should the price of corn decline at harvest time. Which one of the following would he be doing if he purchased financial securities to offset this price risk? A) Insuring B) Deriving C) Hedging D) Forwarding E) Manipulating

Q: Which one of the following will be least helpful in offsetting a company's costs from a loss event? A) Self-insurance pool of cash B) Insurance policy exclusion C) Abidance with policy notification provisions D) Currently paid insurance premiums E) Low insurance deductible

Q: Which type of insurance helps replace a company's income during the time period the company is closed due to a major hurricane? A) Business interruption insurance B) Employer's liability insurance C) Property insurance D) Vehicle insurance E) Commercial liability insurance

Q: Which type of insurance protects against the risks related to a defective manufactured product? A) Business interruption insurance B) Employer's liability insurance C) Property insurance D) Vehicle insurance E) Commercial liability insurance

Q: The first step in risk management is to: A) purchase liability insurance. B) create an emergency cash fund. C) establish prevention programs. D) eliminate all international risks. E) identify and eliminate all strategic risks.

Q: Which type of risk is related to damages arising from a natural disaster? A) Financial risk B) Strategic risk C) Hazard risk D) Occupational risk E) Operational risk

Q: Which one of the following statements is correct? A) In a totally efficient market every investment has a zero net present value. B) Portfolio managers with tenures greater than 10 years, consistently outperform the market. C) The performance of professional money managers improves the longer the investment period. D) Mutual funds that are actively managed outperform index funds over the long term. E) The number of mutual funds outperforming the Vanguard 500 Index Fund over a 10-year period is steadily rising.

Q: Historical returns support which one of the following statements? A) Financial markets are highly inefficient as suggested by behavioral finance. B) Professional money managers tend to outperform the Vanguard 500 index fund about 60 percent of the time on average. C) The longer the time span, the more likely a professional money manager will outperform an index fund, such as the S&P 500. D) Historical data supports the statement that arbitrage results in a 100 percent totally efficient market. E) The financial markets appear to be highly efficient because, on average, they outperform professional money managers.

Q: Which one of the following is given as a key reason why many of the dot-com companies failed following their IPO's? A) Lack of a solid business model B) Lack of internet access C) Market crash in Asia D) Change in government regulations E) Program trading

Q: Which one of these statements related to the Crash of 1987 is false? A) Program trading is at least partially to blame for the market meltdown. B) Between August and October 1987 the market declined over 40 percent. C) In some cases, it became impossible to contact a market maker. D) Trading volume exceeded the market's capacity to handle the order flows. E) Following the Crash of 1987, the market continued to slowly decline over the following year.

Q: Following the Crash of 1929, the stock market: A) began to slowly, but steadily, increase in value. B) was flat for about three years and then began a slow, steady rise to pre-crash values. C) continued to decline slightly before increasing over a 3-year period to its pre-crash values. D) temporarily increased in value and then began a 3-year decline to ten percent of its pre-crash value. E) recouped its 90 percent loss within the following three years.

Q: Which one of the following statements is true? A) Market crashes tend to be accompanied by low market volume. B) The Asian market crash was followed by a quick recovery. C) The market crashes of 1929 and 1987 are very similar in both the percentage decline in market value and in the ensuing market recovery. D) Market crashes tend to follow market bubbles. E) Market bubbles and crashes prove that financial markets are inefficient.

Q: Which one of the following statements related to market crashes is correct? A) Financial market crashes are unique to the United States. B) A market crash tends to occur within a week but have effects that last many years. C) Once the market finally crashed in 1929, stock prices began a long period of steady increases. D) The market crash of 1987 occurred on a day when trading volume was light indicating there were a limited number of irrational investors involved. E) Actions in Washington, D.C., may have helped contribute to the market crash in 1929 but not to the 1987 crash.

Q: Approximately what percent of its total value did the stock market lose on "Black Monday"? A) 19 B) 10 C) 23 D) 30 E) 38

Q: AB Industries is an all-equity firm that has $10 per share in cash and a book value per share of $12. At which one of the following market prices would you know with absolute certainty that the stock was mispriced? A) $9 B) $10 C) $11 D) $12 E) $13

Q: All of the following create limits to arbitrage except: A) firm-specific risk. B) noise traders. C) thinly traded securities. D) rational traders. E) implementation costs.

Q: Which word best describes the stock market during the month of October 1987? A) Crash B) Circle C) Bubble D) Limit E) Flat

Q: Which one of the following is an investment risk that investors face in addition to firm-based risk and market-based risk? A) Management-related risk B) Inflation risk C) Supply chain risk D) Interest rate risk E) Sentiment-based risk

Q: It is believed by some individuals that, in an efficient market, the actions of traders who constantly buy and sell on any perceived market mispricing will in effect cause market prices to correctly reflect asset values. A person who believes that the actions of these traders will not result in correctly valued prices are most apt to believe in which one of the following? A) Gambler's fallacy B) Limits to arbitrage C) Availability bias D) False consensus E) Clustering illusion

Q: Which term refers to the reliance on stereotypes or limited samples to form opinions about an entire class? A) Clustering illusion B) Law of small numbers C) Representativeness heuristic D) False consensus E) Recency bias

Q: The last two promotions within a firm involved individuals who completed the same advanced managerial program. As a result, the company president has stipulated that all future management hires must be graduates of that program. This behavior is typical of someone who has which one of the following characteristics? A) Endowment effect B) Framing effect C) Representativeness heuristic D) Narrow framing E) Affect heuristic

Q: You are the manager of a retail store. You believe the economy is in a recession and that sales for the month will be unusually slow. Since you have complete discretion over the pricing at your location, you decide to have a storewide sale and offer ten percent off all merchandise for a three-day period. You don't expect your superiors to criticize this decision as you believe they, along with the majority of the other store managers, feel the same way about the economy as you do. Which one of the following applies to you? A) Recency bias B) Law of small numbers C) Gambler's fallacy D) False consensus E) Money illusion

Q: Your friends are all investing in a start-up company. You, on the other hand, refuse to invest in the company because you don't know the odds of it becoming successful. Which behavioral characteristic are you displaying? A) Aversion to ambiguity B) Recency bias C) Sentiment-based risk aversion D) Clustering illusion E) Money illusion

Q: You are a hard-charging manager who doesn't really like to sit at a desk for too long. You prefer to gather information quickly, make a decision, and move on to the next item on your agenda. Which one of the following applies to you? A) Availability bias B) Arbitrage limits C) Law of small numbers D) Representativeness heuristic E) Regret aversion

Q: You started an online business two weeks ago. Thus far, you have averaged ten sales a day, which is one sale for every five hits. You are now considering giving up your day job and becoming a full-time online retailer. You have calculated the amount of income you can earn based on ten sales a day and know that level of income would support you in a comfortable fashion. The belief that you will have ten sales per day if this becomes your full-time occupation is based on which one of the following? A) Mental accounting B) Anchoring and adjustment C) Law of small numbers D) Bubble and crash theory E) Confirmation bias

Q: The last six times you purchased a stock you earned high returns within one year. Thus, you believe you will have the same result with your next stock purchase. This is an example of which one of the following? A) Recency bias B) Anchoring and adjustment C) Frame dependence D) Aversion to ambiguity E) Clustering illusion

Q: You are employed as a commission-based sales clerk for a cosmetics retail store. You know that, on average, exactly 50 percent of the customers that enter your store will make at least one purchase. Thus far this morning, you have waited on eight customers without making a single sale. You are convinced that the next customer you wait on will buy something. This belief is known as: A) aversion to ambiguity. B) the law of small numbers. C) anchoring and adjusting. D) gambler's fallacy. E) false consensus.

Q: Up until three years ago, A.C. Dime opened an average of ten new retail stores a year. One of every ten new stores had to be closed within two years due to poor sales. This 90 percent success ratio was fairly steady for over 30 years. Starting three years ago, the firm has opened 40 new stores and every one had significant profits within six months. Management believes their recent success is not just a random event and that all future stores will be profitable. Thus, the managers have decided to open a minimum of 15 new stores each year. The managers are suffering from: A) arbitrage limitations. B) anchoring and adjustment. C) aversion to ambiguity. D) the clustering illusion. E) myopic aversion.

Q: Roger's Meat Market is a chain of retail stores that limits its sales to fresh-cut meats. The stores have been very profitable in northern cities. However, when two stores were opened in the south, both lost money and had to be closed. Roger, the owner, has now concluded that no southern-based store should be opened as it would not be profitable. Which one of the following applies to Roger? A) Confirmation bias B) Endowment effect C) Money illusion D) Affect heuristic E) Representativeness heuristic

Q: You recently overheard your boss telling someone that if he'd actually crunched some numbers and done some analysis instead of just going with his instincts, he never would have opened the new store in Centre City. Which one of the following caused your boss to make a bad decision? A) Regret aversion B) Endowment effect C) Money illusion D) Affect heuristic E) Representativeness heuristic

Q: Which term refers to the tendency to shy away from the unknown? A) Aversion to ambiguity B) Clustering illusion C) Anchoring and adjustment D) Recency bias E) Availability bias

Q: Bill feels that he possesses a good dose of "street smarts." Thus, he makes his business decisions based on how a project feels to him rather than taking the time to financially analyze a project. This type of behavior is referred to as: A) overconfidence. B) endowment effect. C) money illusion. D) affect heuristic. E) sentiment-based risk.

Q: A tendency to be overly conservative when faced with new information is referred to as: A) anchoring and adjustment. B) heuristics. C) self-attribution. D) loss aversion. E) regret aversion.

Q: You have a tendency to take credit for the decisions you make that have good outcomes even when those outcomes are out of your control. On the other hand, you blame bad luck for your decisions that turn out badly. Which of these terms applies to you? A) Myopic loss aversion B) House money effect C) Money illusion D) Self-attribution bias E) Endowment effect

Q: Kate is attempting to sell her house for $260,000. Fred lives across the street in an identical house. Fred recently stated to his wife that Kate's house is probably worth only $250,000 but that once she sells her house, he would like to put their house on the market at $285,000 and then move into a condominium. Which one of the following behaviors applies to Fred? A) Myopic loss aversion B) House money effect C) Money illusion D) Self-attribution bias E) Endowment effect

Q: Phyllis is planning for her retirement in 15 years. She currently lives comfortably on $38,000 a year given that she is debt-free. Based on her family history she only expects to live ten years after she retires. Thus, she computes her retirement need as $38,000 a year for ten years. Which one of the following behaviors applies to Phyllis? A) Regret aversion B) Money illusion C) Self-attribution bias D) Endowment effect E) Myopic loss aversion

Q: Ramon opened a combination laundry and dry cleaning establishment three years ago that is quite successful. He has considered expanding this business by opening another location but keeps putting off that decision for fear that the second location will not be a success. Ramon is currently displaying which one of the following behavioral characteristics? A) Self-attribution bias B) Overconfidence C) Regret aversion D) House money effect E) Frame dependence

Q: Over the past six months, you have watched as your parent's retirement savings have declined in value by 25 percent due to a severe financial market downturn. As a result, you have decided that you will never invest in stocks for your own retirement but will instead keep all of your money in an insured bank account. Which behavioral characteristic have you acquired as a result of the market downturn? A) Myopic loss aversion B) Get-evenitis C) Self-attribution bias D) Mental accounting E) Regret aversion

Q: Steve purchased a stock last year for $34 a share. The stock increased in value to $36 a share before declining to its current value of $30. Steve has decided to sell the stock, but only if he can receive $34 a share or better. Steve is primarily suffering from which one of the following behavioral conditions? A) Representativeness heuristic B) House money C) Loss aversion D) Randomness E) Myopic loss aversion

Q: The tendency to sell winners and hold losers is known as the: A) representativeness heuristic. B) disposition effect. C) house money effect. D) self-attribution bias. E) affect heuristic.

Q: Recently, a neighbor you have known for years won a lottery and received a $250,000 prize. This neighbor decided to invest all of his winnings in a new business venture that he knew only had a 5 percent chance of success. Previous to this, the neighbor had always been ultra conservative with his money and had refused to invest in this business venture as recently as last week. Which one of the following behaviors most applies to your neighbor's decision to invest in this business venture now? A) Disposition effect B) Affect heuristic C) Gambler's fallacy D) House money E) Get-evenitis

Q: Consumer Marketing just conducted a two-phase survey. In the first phase, the survey questions were worded such that the answers tended to sound positive. In the second phase, the survey questions were reworded so the answers tended to convey a negative feeling. Both sets of survey questions should have resulted in similar results as the information solicited was essentially identical. However, the survey results varied significantly. This survey best illustrates which one of the following? A) Mental accounting B) Overconfidence C) Self-attribution bias D) Confirmation bias E) Frame dependence

Q: Aivree wants to accumulate great wealth but she invests all of her funds in U.S. Treasury bills because she wants to avoid the potential losses she knows can occur in the stock markets. Aivree best illustrates which one of these characteristics? A) Loss aversion B) Gambler's fallacy C) Disposition effect D) Law of small numbers E) Mental accounting

Q: Which one of the following refers to the fact that an individual may reply differently if a question is asked in an equivalent but different manner? A) Loss aversion B) Gambler's fallacy C) Frame dependence D) Overconfidence E) Format reference

Q: Kate tends to hold onto assets that have lost value in the hope that their values will increase in the future. Kate illustrates which one of the following? A) Frame dependence B) Self-attribution bias C) Gambler's fallacy D) Break-even effect E) Regret aversion

Q: Alice believes she can accurately forecast the future and makes business decisions based on this belief. Which characteristics does this belief represent? A) Overconfidence B) Overoptimism C) Affect heuristic D) Confirmation bias E) Representativeness heuristic

Q: Marzella Corp. is analyzing a project that involves expanding the firm into a new product line. The project's financial projections will tend to have which one of the following characteristics if the person compiling those projections suffers from overoptimism? A) Overestimated construction costs B) Overestimated expenses C) Overestimated net present values D) Underestimated profits E) Underestimated sales estimates

Q: Assume you are an overconfident manager. You are most apt to do which one of the following more so than you would if you were not overconfident? A) Research a project more thoroughly before committing funds to commence it B) Accept risky projects that turn out to be less profitable than you expected C) Wait until new technology proves its worth before incorporating it into your firm's operations D) Avoid mergers and acquisitions E) Invest excess company cash more conservatively than your peers at other firms

Q: Which one of the following best illustrates an error which you, as a project manager, might make due to confirmation bias? A) Overestimating the best outcome expected from a project while underestimating the possibility of a less favorable outcome B) Assuming that a new project will be profitable since similar projects in the past were successful C) Assuming that your expectations of the future outcome from a project are more accurate than the expectations of others within your organization D) Listening to the advice of subordinates with whom you agree while ignoring the advice of subordinates with whom you tend to disagree E) Downplaying the cost of future failure of an existing project since the project has already paid for itself

Q: The tendency for a decision maker to search for reassurance that a recent decision he or she made was a good decision represents which one of the following characteristics? A) Overconfidence B) Overoptimism C) Affect heuristic D) Confirmation bias E) Representativeness heuristic

Q: Anytime Ted analyzes a proposed project, he always assigns a much higher probability of success to the project than is warranted by the information he has gathered. Ted suffers from which one of the following? A) Frame dependence B) Mental accounting C) Endowment effect D) Confirmation bias E) Overoptimism

Q: Jeremy believes he excels at picking stock winners and thus trades frequently. Which characteristic does he most likely represent? A) Confirmation bias B) Frame dependence C) Overconfidence D) Representativeness heuristic E) Break-even effect

Q: Peter has successfully managed the finances of A.D. Leadbetter in a manner that has yielded abnormally high returns. Due to this success, Peter has decided to publish a newsletter for financial executives so that he can share his superior financial wisdom with others. There is a very real probability that Peter has which one of the following characteristics? A) Gambler's fallacy B) Frame dependence C) Overconfidence D) Representativeness heuristic E) Sentiment-based risk attitudes

Q: Nadine made a business decision that turned out badly. In reflecting upon her decision, she decided it was a reasoning error that led to the faulty decision. Which one of the following areas of study best applies to this situation? A) Corporate ethics B) Financial statement analysis C) Managerial finance D) Debt management E) Behavioral finance

Q: Suppose the spot and three-month forward rates for the yen are 102.32 and 102.27, respectively. What is the approximate annual percent difference between the inflation rate in Japan and in the U.S.? A) 1.93 percent B) −1.21 percent C) 1.67 percent D) −.20 percent E) 2.28 percent