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Risk Management Exam 1
Terms in this set (20)
You have an exploration and production company that produces natural gas. You are concerned the price of natural gas might drop and cause your profits to decrease. Which of the following would be an appropriate way to hedge your risk?
D. Either A or B
A. Buy a put option on natural gas
B. Sell a futures contract on natural gas
A producer of a commodity hedges by a zero-cost collar. That means, the company _______ a ______ and _________ a _______.
Buys; put; writes; call
Which of the following statements is/are true regarding the delta of a call option
delta of a call option is positive
Which of the following is (are) true about the Black-Scholes model?
D. Both A and B
A. If the volatility of the underlying market condition increases, the value of a call will increase
B. If the volatility of the underlying market condition increases, the value of a put will increase
Which of the following statements is/are true about a normally distributed random variable?
E. None of the above
A. Skewness of a normal distribution is always positive
B. Covariance and correlation of a normal are negative
C. Inflection points of a normal probability density function are found at one variance above and below the mean
D. Mean of a normally distributed random variable is always zero
Which of the following statements are true about lognormal distributions?
D. All of the above
A. If the random variable X is log-normally distributed, then Y=ln(X) has a normal distribution.
B. If random variable Y has a normal distribution, then X=exp(Y) has a log-normal distribution.
C. A random variable which is log-normally distributed takes only positive real values
Kurtosis is important to risk management because it is a measure of
The fatness of the tails of the distribution of a random variable
Why is the t-statistic of the slope of a linear regression important?
It tells you the statistical significance of the slope of the regression line
Why do finance researchers often use ARCH or GARCH models to model volatility?
Volatility of financial variables often show the clustering of an ARCH/GRACH process
Which of the following are valid reasons for a business to hedge its risks?
E. Both A and C
A. Hedging benefits managers who are otherwise un-diversified and overly subject to the firm's idiosyncratic risk
C. Under a progressive tax rate, volatile earnings induce higher taxes than stable earnings
Which of the following is (are) true about futures contracts?
E. All of the above
A. Futures contracts are traded on organized exchanges
B. Futures contracts are only traded in standardized amounts
C. Futures contracts use a clearing house that is a party to both sides of a contract
D. Futures contracts are marked to market daily
How does the delta of a futures contract change when the price of the underlying market condition changes?
Delta is unchanged when the underlying changes
What is the time value of an option?
The market value of the option minus the intrinsic value
What happens to the value of stock options when the interest rate increases?
Decreases the value of a Put and increases the value of a Call
What is the VIX derived from?
Implied volatility of the S&P 500 Index over next 30 days from option prices
What is a 'volatility smile'?
The situation where In-The-Money and Out-Of-The-Money call options have higher implied volatility than At-The-Money call options
Which of the following is/are true about Out-Of-The-Money options?
They have zero intrinsic value, but may have positive time value
What happens when the convenience yield of a commodity is greater than the carrying charge?
Futures are in backwardation
When is convenience yield at its lowest?
Periods of low demand and supply excess
Why does electricity not have carrying charges?
B. Electricity is not storable
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