Question 1
GFF Inc. (GFF) plans to issue $50 million face value of six-month commercial paper in three
months. If issued today, the commercial paper would sell at an interest rate of 3%. However,
interest rates will likely increase in the next three months. The correlation between changes in
the yields on GFF’s commercial paper and those on bankers’ acceptances (BA) is 0.95.
How can GFF best hedge against the interest rate risk today?
a) Buy a three-month interest rate call option.
b) Enter into an interest rate swap agreement.
c) Sell a three-month interest rate put option.
d) Sell three-month (BA) future contracts.
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Question 2
Saskatoon Hydro Co. (SHC) currently has $10.0 million in floating rate debt with interest
payable at prime rate plus 0.5%. As the CFO of SHC believes the prime rate will increase in the
future, he considers it prudent to take steps now to better manage the utilities interest rate risk. In
this respect, SHC identified a counterparty with $12.0 million in debt at a fixed rate of 6.0%.
SHC entered into the following interest rate swap on January 1, 20X5, when the prime rate was
3.5%:
SHC will pay the counterparty a fixed rate of 5.0% on a notional loan of $5.0 million.
The counterparty will pay SHC a floating rate of prime rate plus 1.0% on a notional loan of $5.0
million.
If the prime rate increased to 4.0% on May 1, 20X5, what was the net amount of interest that
SHC paid in 20X5?
a) $225,000
, b) $425,000
c) $441,667
d) $450,000
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Question 3
A condensed statement of financial position with some supplemental information for
Newfoundland Bank Corp. (NBC) as at December 31, 20X4, is as follows:
Amount Average Amount Average
Assets ($millions) yield (%) Liabilities ($millions) cost (%)
Cash 10 0.00 Non-earning 5 0.00
Rate-sensitive 400 5.75 Rate-sensitive 475 3.25
Fixed rate 220 6.25 Fixed rate 90 4.50
Equity 60 N/A
Total 630 Total 630
The CFO of NBC is concerned that interest rates are going to increase shortly and is trying to
measure the bank’s exposure so he can take steps to hedge the risk. If interest rates increase by
0.5% on January 1, 20X5, and affect all interest rate-sensitive securities equally, what will be the
change in net interest margin (NIM) in 20X5 compared to 20X4?
a) NIM will decrease by $375,000.
b) NIM will decrease by $650,000.
c) NIM will increase by $375,000.
NIM will increase by $650,000.
d)
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Question 4
Which of the following statements best describes an opportunistic approach to risk management?
The firm develops a complete hedging strategy to minimize its risk exposure and
a) follows it with some exceptions. The exceptions occur when management
strongly believes it can benefit by taking an opportunistic position in the market
or when the risks are not so high.
b) The firm ignores risk and relies on its ability to ride the fluctuations. It is
assumed that any gains or losses will balance over the long run.
The firm reacts when potential adverse changes in the interest rate, foreign
c) exchange rate, or commodity prices threaten substantial losses that may lead
to bankruptcy. It takes action in the financial market to insure against major
risks.
d) The firm actively forecasts financial and/or commodity prices. Decisions are
made based on the forecast to benefit from changes in these prices.
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Question 5
Bojangles Corp. has some U.S. dollar denominated assets and is interested in hedging its
exposure to the underlying foreign exchange risk. Management is deciding whether to use a
futures contract or a forward contract to hedge its exposure and is presently comparing the
similarities and differences between these two alternatives.
Which of the following statements is true?
a) The counterparty default risk associated with futures contracts is minimized
in forward contracts.
b) Both forward contracts and futures contracts require the company to maintain
a margin account.
It is easier to achieve a perfect hedge with forward contracts than with future
c) contracts.
, d) Both forward contracts and futures contracts are offered in standardized amounts.
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Question 6
Eldorado Inc. (Eldorado) operates a Canadian gold mine. Gold is priced and sold in U.S. dollars
both domestically and internationally. Gold prices have been increasing, and many experts
believe that the price has peaked and may drop soon. Eldorado operates mainly within Canada
and incurs most expenses in Canadian dollars. The Canadian/U.S. dollar exchange rate has been
fairly stable, and there is no indication that this will change in the near term. Based on the
foregoing, what is the most cost-effective way for Eldorado to hedge its exposure to the change
in gold prices?
a) Eldorado should buy a gold futures contract.
b) Eldorado should buy gold put options.
c) Eldorado should sell gold call options.
d) Eldorado should sell gold forward.
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Question 7
Due to the presence of information asymmetry, managers of a publicly traded company are able
to engage in unethical behaviour to enrich themselves or the company at the expense of other
stakeholders. Which of the following transactions would be the best choice for protecting the
stakeholders’ interests?
a) Acquiring another company
GFF Inc. (GFF) plans to issue $50 million face value of six-month commercial paper in three
months. If issued today, the commercial paper would sell at an interest rate of 3%. However,
interest rates will likely increase in the next three months. The correlation between changes in
the yields on GFF’s commercial paper and those on bankers’ acceptances (BA) is 0.95.
How can GFF best hedge against the interest rate risk today?
a) Buy a three-month interest rate call option.
b) Enter into an interest rate swap agreement.
c) Sell a three-month interest rate put option.
d) Sell three-month (BA) future contracts.
Vie
w
Feedback
Question 2
Saskatoon Hydro Co. (SHC) currently has $10.0 million in floating rate debt with interest
payable at prime rate plus 0.5%. As the CFO of SHC believes the prime rate will increase in the
future, he considers it prudent to take steps now to better manage the utilities interest rate risk. In
this respect, SHC identified a counterparty with $12.0 million in debt at a fixed rate of 6.0%.
SHC entered into the following interest rate swap on January 1, 20X5, when the prime rate was
3.5%:
SHC will pay the counterparty a fixed rate of 5.0% on a notional loan of $5.0 million.
The counterparty will pay SHC a floating rate of prime rate plus 1.0% on a notional loan of $5.0
million.
If the prime rate increased to 4.0% on May 1, 20X5, what was the net amount of interest that
SHC paid in 20X5?
a) $225,000
, b) $425,000
c) $441,667
d) $450,000
Vie
w
Feedback
Question 3
A condensed statement of financial position with some supplemental information for
Newfoundland Bank Corp. (NBC) as at December 31, 20X4, is as follows:
Amount Average Amount Average
Assets ($millions) yield (%) Liabilities ($millions) cost (%)
Cash 10 0.00 Non-earning 5 0.00
Rate-sensitive 400 5.75 Rate-sensitive 475 3.25
Fixed rate 220 6.25 Fixed rate 90 4.50
Equity 60 N/A
Total 630 Total 630
The CFO of NBC is concerned that interest rates are going to increase shortly and is trying to
measure the bank’s exposure so he can take steps to hedge the risk. If interest rates increase by
0.5% on January 1, 20X5, and affect all interest rate-sensitive securities equally, what will be the
change in net interest margin (NIM) in 20X5 compared to 20X4?
a) NIM will decrease by $375,000.
b) NIM will decrease by $650,000.
c) NIM will increase by $375,000.
NIM will increase by $650,000.
d)
, Vie
w
Feedback
Question 4
Which of the following statements best describes an opportunistic approach to risk management?
The firm develops a complete hedging strategy to minimize its risk exposure and
a) follows it with some exceptions. The exceptions occur when management
strongly believes it can benefit by taking an opportunistic position in the market
or when the risks are not so high.
b) The firm ignores risk and relies on its ability to ride the fluctuations. It is
assumed that any gains or losses will balance over the long run.
The firm reacts when potential adverse changes in the interest rate, foreign
c) exchange rate, or commodity prices threaten substantial losses that may lead
to bankruptcy. It takes action in the financial market to insure against major
risks.
d) The firm actively forecasts financial and/or commodity prices. Decisions are
made based on the forecast to benefit from changes in these prices.
Vie
w
Feedback
Question 5
Bojangles Corp. has some U.S. dollar denominated assets and is interested in hedging its
exposure to the underlying foreign exchange risk. Management is deciding whether to use a
futures contract or a forward contract to hedge its exposure and is presently comparing the
similarities and differences between these two alternatives.
Which of the following statements is true?
a) The counterparty default risk associated with futures contracts is minimized
in forward contracts.
b) Both forward contracts and futures contracts require the company to maintain
a margin account.
It is easier to achieve a perfect hedge with forward contracts than with future
c) contracts.
, d) Both forward contracts and futures contracts are offered in standardized amounts.
Vie
w
Feedback
Question 6
Eldorado Inc. (Eldorado) operates a Canadian gold mine. Gold is priced and sold in U.S. dollars
both domestically and internationally. Gold prices have been increasing, and many experts
believe that the price has peaked and may drop soon. Eldorado operates mainly within Canada
and incurs most expenses in Canadian dollars. The Canadian/U.S. dollar exchange rate has been
fairly stable, and there is no indication that this will change in the near term. Based on the
foregoing, what is the most cost-effective way for Eldorado to hedge its exposure to the change
in gold prices?
a) Eldorado should buy a gold futures contract.
b) Eldorado should buy gold put options.
c) Eldorado should sell gold call options.
d) Eldorado should sell gold forward.
Vie
w
Feedback
Question 7
Due to the presence of information asymmetry, managers of a publicly traded company are able
to engage in unethical behaviour to enrich themselves or the company at the expense of other
stakeholders. Which of the following transactions would be the best choice for protecting the
stakeholders’ interests?
a) Acquiring another company
