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Chapter 18 Write Out

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CHAPTER 18
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DERIVATIVES AND RISK MANAGEMENT (Difficulty: E = Easy, M = Medium, T = Tough) Multiple Choice: Conceptual Easy: Risk management Answer: d Diff: E N
. Which of the following statements concerning risk management is correct?

a. Risk management can reduce the volatility of cash flows, and this decreases the probability of bankruptcy. b. Risk management can reduce the likelihood of low cash flows, and therefore reduce the probability of financial distress. 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. Statements a, b, and c are correct. e. None of the statements above is correct.

Derivatives Answer: d Diff: E N
. Which of the following is an example of a derivative?

a. Futures.
b. Options.
c. Swaps.
d. All of the above are examples of derivatives.
e. None of the above are examples of derivatives.

Options Answer: b Diff: E . An option that gives the holder the right to sell a stock at a specified price at some time in the future is called a(n) a. Call option. b. Put option. c. Out-of-the-money option. d. Naked option. e. Covered option. Option value Answer: d Diff: E . The value of an option depends on the stock’s price, the risk-free rate, and the a. Exercise price. b. Variability of the stock price.

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