contracts are used for hedging D) None of the above Answer: D 10) A company due to pay a certain amount of a foreign currency in the future decides to hedge with futures contracts. Which of the following best describes the advantage of hedging? A) It leads to a better exchange rate being paid B) It leads to a more predictable exchange rate being paid C) It caps the exchange rate that will be paid D) It provides a floor for the exchange rate that will be paid Answer: B 1) Which of the following best describes the capital asset pricing model? A) Determines the amount of capital that is needed in particular situations B) Is used to determine the price of futures contracts C) Relates the return on an asset to the return on a stock index D) Is used to determine the volatility of a stock index Answer: C 12) Which of the following best describes "stack and roll"? A) Creates long-term hedges from short term futures contracts B) Can avoid losses on futures contracts by entering into further futures contracts C) Involves buying a futures contract with one maturity and selling a futures contract with a different maturity D) Involves two different exposures simultaneously Answer: A 13) Which of the following increases basis risk? A) A large difference between the futures prices when the hedge is put in place and when it is closed out B) Dissimilarity between the underlying asset of the futures contract and the hedger's exposure C) A reduction in the time between the date when the futures contract is closed and its delivery month D) None of the above Answer: B 14) Which of the following is a reason for hedging a portfolio with an index futures? A) The investor believes the stocks in the portfolio will perform better than the market but is uncertain about the future performance of the market B) The investor believes the stocks in the portfolio will perform better than the market and the market is expected to do well C) The portfolio is not well diversified and so its return is uncertain D) All of the above Answer: A 15) Which of the following does NOT describe beta? A) A measure of the sensitivity of the return on an asset to the return on an index B) The slope of the best fit line when the return on an asset is regressed against the return on the market C) The hedge ratio necessary to remove market risk from a portfolio D) Measures correlation between futures prices and spot prices Answer: D 16) Which of the Tolowing is trugy contracts are used for hedging D) None of the above Answer: D 10) A company due to pay a certain amount of a foreign currency in the future decides to hedge with futures contracts. Which of the following best describes the advantage of hedging? A) It leads to a better exchange rate being paid B) It leads to a more predictable exchange rate being paid C) It caps the exchange rate that will be paid D) It provides a floor for the exchange rate that will be paid Answer: B 1) Which of the following best describes the capital asset pricing model? A) Determines the amount of capital that is needed in particular situations B) Is used to determine the price of futures contracts C) Relates the return on an asset to the return on a stock index D) Is used to determine the volatility of a stock index Answer: C 12) Which of the following best describes "stack and roll"? A) Creates long-term hedges from short term futures contracts B) Can avoid losses on futures contracts by entering into further futures contracts C) Involves buying a futures contract with one maturity and selling a futures contract with a different maturity D) Involves two different exposures simultaneously Answer: A 13) Which of the following increases basis risk? A) A large difference between the futures prices when the hedge is put in place and when it is closed out B) Dissimilarity between the underlying asset of the futures contract and the hedger's exposure C) A reduction in the time between the date when the futures contract is closed and its delivery month D) None of the above Answer: B 14) Which of the following is a reason for hedging a portfolio with an index futures? A) The investor believes the stocks in the portfolio will perform better than the market but is uncertain about the future performance of the market B) The investor believes the stocks in the portfolio will perform better than the market and the market is expected to do well C) The portfolio is not well diversified and so its return is uncertain D) All of the above Answer: A 15) Which of the following does NOT describe beta? A) A measure of the sensitivity of the return on an asset to the return on an index B) The slope of the best fit line when the return on an asset is regressed against the return on the market C) The hedge ratio necessary to remove market risk from a portfolio D) Measures correlation between futures prices and spot prices Answer: D 16) Which of the Tolowing is trugy