20.9: Multiple Choice

1.

Which of the following does a financial manager want to do to maximize the value of the firm?

1. Decrease the speed of money coming into the firm
2. Speed up cash going out and slow down cash coming in
3. Decrease the riskiness of cash inflows and cash outflows
4. Increase the volatility and speed of cash going out of the firm

2.

In finance, risk is ________.

1. the same thing as profit
2. ignored because it is inevitable
3. thought of as uncertainty or unpredictability
4. something that financial managers should strive to increase and maximize

3.

American Jeans Corp. purchases a cotton farm. The cotton grown on the farm will be used to make denim cloth for the company’s jeans. This is an example of ________.

1. striking a price
2. vertical integration
3. a forward contract
4. an American option

4.

The price that a holder of an option pays to buy the underlying asset when exercising a call option is known as ________.

1. the strike price
2. the maturity price
3. the exchange price
4. the underlying premium

5.

Which of the following gives the holder the right, but not the obligation, to purchase an underlying asset?

1. A call option
2. A forward contract
3. A European put option
4. An American put option

6.

An American option allows the holder to ________.

1. exercise the option only on the expiration date
2. exercise the option at any time up to and including the expiration date
3. sell stocks, and a European option allows the holder to purchase stocks
4. purchase stocks, and a European option allows the holder to purchase bonds

7.

The holder of a(n) ________ has the right to buy and the holder of a(n) ________ has the right to sell an underlying asset.

1. call option; put option
2. put option; call option
3. American option; European option
4. European option; American option

8.

The three main categories of foreign exchange risk a company faces are ________.

1. economic risk, business risk, and exposure risk
2. exposure risk, fluctuation risk, and forward risk
3. transaction risk, translation risk, and economic risk
4. appreciation risk, depreciation risk, and duplication risk

9.

In January, the exchange rate between the South Korean won and the US dollar was /**/{\rm{KWN\;1,100 = USD\;1}}/**/. Three months later, the exchange rate was /**/{\rm{KWN\;1,200 = USD\;1}}/**/. This means that ________.

1. the Korean won appreciated relative to the US dollar
2. the Korean won depreciated relative to the US dollar
3. the US dollar depreciated relative to the Korean won
4. both the Korean won and the US dollar appreciated

10.

In January, the exchange rate between the South Korean won and the US dollar was /**/{\rm{KWN\;1,100 = USD\;1}}/**/. Three months later, the exchange rate was /**/{\rm{KWN\;1,200 = USD\;1}}/**/. This means that ________.

1. it will cost US companies more to purchase raw materials from South Korea
2. it will cost Korean companies more to purchase raw materials from the United States
3. US companies that sell their products in South Korea will find their revenue has increased
4. Korean companies that sell their products in the United States will find that their revenue has decreased

11.

A foreign exchange forward contract ________.

1. is a standardized contract that is inflexible
2. occurs when a company swaps its translation exposure for transaction exposure
3. is a contractual agreement between two parties to exchange a specified amount of currencies on a future date
4. states the date on which a trade will take place, but the price for the trade will be determined at the time the trade occurs

12.

Which of the following is a measure of interest rate risk?

1. LIBOR
2. Duration
3. Translation exposure
4. Contract inflexibility

13.

A swap occurs when ________.

1. a company exchanges obligations with another company to make specified payment streams
2. a company purchases commodities from a company in another country, exposing it to both commodity and currency risk
3. a company chooses a local supplier over an international supplier to avoid currency exposure
4. a company chooses a foreign supplier so that its commodity risk will be offset by its currency risk