12.

a. Risk management can reduce the volatility of cash flows, and this decreases the probability of bankruptcy.

b. Risk management makes sense for firms directly engaged in activities that involve commodities whose values can be hedged, and it doesnt make much sense for most other firms.

c. Companies with volatile earnings pay more taxes than more stable companies due to the treatment of tax credits and the rules governing corporate loss carry-forwards and carry-backs. Therefore, our tax system encourages risk management to stabilize earnings.

d. Risk management benefits managers who are at risk for being fired if results are poor.

13. ______________ is when derivatives are used to try and make money by taking on risk.

Hedging

Speculation

Arbitrage

Commodity

14. Suppose you believe that Du Ponts stock price is going to decline from its current level of $82.50 sometime during the next 5 months. For $510.25 you could buy a 5-month put option giving you the right to sell 100 shares at a price of $83.00 per share. If you bought a 100-share contract for $510.25 and Du Ponts stock price actually dropped to $63.00, what would be your net profit (after transactions costs but before taxes)?

a. $1,950.00 b. $1,439.75 c. $1,489.75 d. $2,435.00

15. A swap is a method for reducing financial risk. Which of the following statements about swaps is not correct?

a. A swap involves the exchange of cash payment obligations.

b. The earliest swaps were currency swaps, in which companies traded debt denominated in different currencies, say dollars and pounds.

c. Swaps are generally arranged by a financial intermediary, who may or may not take the position of one of the counterparties.

d. A problem with swaps is the lack of standardized contracts, which limits the development of a secondary market.