REVIEW HINTS MANAGING FINANCIAL RISK (FMR) AND
THE FASB’S SUMMARY OF DERIVATIVES TYPES
(Both Readings Cover the Same Topics)

CHAPTER 1

  1. Financial risk is:
  1. Interest-rate risk refers to:
  1. Short-term interest rates:
  1. The prices of long-term bonds:
  1. Duration is:
  1. The term structure of interest rates describes the relationship between the:
  1. According to the expectations theory of the yield curve, a downward sloping yield curve means that market participants expect:
  1. The term structure theory which predicts long-term interest rates will, on average, be higher than short-term interest rates is called:
  1. The goal of financial engineering is to:
  1. A major purpose of financial risk management is to:

CHAPTER 2

  1. The forward exchange rate locked in with a forward exchange-rate contract:
  1. The Eurocurrency market is:
  1. The U.S. dollar forward exchange rate premium or discount on the British pound sterling is most likely to be equal to:
  1. A forward exchange contract to buy German marks in 60 days can be replicated by:
  1. A forward rate agreement is:
  1. The contractual rate on a Norwegian FRA can be derived from:
  1. With a forward exchange-rate contract, payment must be made:

CHAPTER 3

  1. The settlement price of a futures contract is:
  1. The process of marking futures contracts to market has the effect of:
  1. Marking to market is generally thought to:
  1. Price limits are most likely to be associated with:
  1. Foreign-currency contracts are likely to be used to:
  1. A person wanting to lock in an exchange rate for the payment of a foreign-currency obligation to someone else would:
  1. Basis in futures-contract trading refers to:
  1. A basic relationship in financial futures pricing is that:

CHAPTER 4

  1. An option contract gives the option holder:
  1. An option to sell an asset is called:
  1. An option to by an asset is called:
  1. A European option:
  1. A call option can be replicated by:

CHAPTER 5

  1. A major advantage of options over futures contracts for hedging purposes is:
  1. Foreign-currency options are available:
  1. An expected receipt of German marks by an American exporter can be hedged best by:
  1. Using foreign-currency futures options instead of underlying foreign-currency futures contracts:
  1. The writers of currency call options:
  1. To set a cap on the interest rate that a company must pay for a future loan, the treasurer can:
  1. The interest-rate cap that a corporate treasurer can set on a future loan is equal to the rate implied by the strike price of an interest-rate:
  1. The value of an interest-rate call option will increase if:
  1. The option delta is:

CHAPTER 6

  1. An interest rate swap usually involves:
  1. Usually, interest rate swaps are:
  1. In an interest rate swap, the firm wishing floating-rate debt:
  1. In an interest rate swap:
  1. An interest rate swap is:
  1. Swaptions are:
  1. One reason interest rate swaps exist is that:
  1. A currency swap is:
  1. Circus swaps are:
  1. In efficient markets, the value of an outstanding interest rate swap:

CHAPTER 7

  1. An expected receipt of British pounds in ninety days can be fully hedged:
  1. If a company uses a forward contract to fully hedge a required payment of yen in ninety days:
  1. A risk management product which is similar to a cylinder is:
  1. A corporate treasurer could set a cap and a floor on the interest rate for a future loan by:
  1. A bank could set a cap and a floor on the interest rate it receives from a commercial loan by:
  1. A corporate treasurer could convert a floating-rate loan to a synthetic fixed-rate loan by:
  1. If interest rates are expected to rise:

From the FASB document entitled Summary of Derivative Types at
J:\courses\acct5341\fasb\sfas133\derivsum.doc

Be prepared for essay questions about the following:

  1. Determination of Fair Value pp. 4-7
  2. What is duration and why is it important? pp. 11-17
  3. How are forward rates derived? pp. 19-20
  4. How are yield curves derived? pp. 19-27
  5. What are the types of risks in derivatives? pp. 75-76
  6. Glossary terms pp. 77-81

Sometimes I ask students to provide the FAS 133 journal entries for examples given in he FASB document entitled Summary of Derivative Types at
J:\courses\acct5341\fasb\sfas133\derivsum.doc

All Possible Quiz Questions for each week are topics for examination questions.