FIN 6100 Exam Questions With Complete Solutions
A well-designed hedging program... Correct Answers reduces
both risks and costs
Acquisitions Correct Answers one party buys out the other, and
the target ceases to exist. The shareholders will be given a
payment to walk away and the acquirer will take over ownership
and management.
American Options Correct Answers can be exercised at any
time up to the expiration date
An effective hedging program... Correct Answers doesn't
attempt to eliminate all risk
-transforms unacceptable risks into acceptable form
-determine the risks a company is willing to bear and ones its
willing to transform through hedging
-goal is to help company achieve optimal risk profile that
balances benefits of protection against cost of hedging
Bad Reasons for M&A Correct Answers -having to spend
money
-diversification
-ratcheting up earnings
Binomial Option Pricing Correct Answers No Arbitrage
Pricing
-any two assets that have the same future payout with the same
amount of risk, should have the same price
,-to solve for price of option, create mix of assets that give the
same payout as the option.
Binomial Pricing Correct Answers -inverse of the hedge ratio
-increments can be as small as needed
Black-Scholes Pricing Model Correct Answers Attempts to
determine whether an option is fairly priced, over-valued or
undervalued. It considers the price of the underlying stock, the
strike price, time until expiration, volatility of the underlying
stock, interest rates, and the risk-free rate of return.
Call Option Correct Answers the option to buy shares of stock
at a specified time in the future
-investors purchase calls if they expect the underlying security's
price to rise
Carve-outs Correct Answers services that are reimbursed in
addition to the base rate for the patient
-shares of new company are sold through an IPO to new set of
investors to raise money
-independent firms
Cash Mergers Correct Answers acquiring company will use
existing funds or issue new debt to buy the target company.
-in an asset acquisition, the target company will receive cash for
their assets, and use it to pay off any liabilities
-in equity acquisition, the acquirer pays the shareholders cash
for their shares and takes over the assets and liabilities of the
target firm
, Combined value Correct Answers No synergy = sum of two
prior net income
Conglomerate Merger Correct Answers the joining of firms in
completely unrelated industries
Continuous Compounding Correct Answers FV = PV x e ^
(rate * time period)
Corporate Hedging Process Correct Answers Derivations is
part of our commitment to work with you to create financial
solutions
Corporate Hedging Steps Correct Answers 1. Identify risk
-two categories
1. operating risk
2. financial risk
-distinguish between risks company is paid to take and ones
they aren't
-consider materiality of potential loss that might occur
2. Distinguish between Hedging and Speculating
-A properly constructed hedge always lowers risk; choosing not
to hedge puts people at risk
-A reason some managers might not hedge is because not
hedging often goes unnoticed by company's board of directors
-Hedging strategies receive a lot of scrutiny
-Educate board of directors on risk
3. Evaluate the Costs of hedging in Light of the Costs of not
Hedging
-to accurately evaluate the cost of hedging, the risk manager
must consider it in the light of the implicit cost of not hedging
A well-designed hedging program... Correct Answers reduces
both risks and costs
Acquisitions Correct Answers one party buys out the other, and
the target ceases to exist. The shareholders will be given a
payment to walk away and the acquirer will take over ownership
and management.
American Options Correct Answers can be exercised at any
time up to the expiration date
An effective hedging program... Correct Answers doesn't
attempt to eliminate all risk
-transforms unacceptable risks into acceptable form
-determine the risks a company is willing to bear and ones its
willing to transform through hedging
-goal is to help company achieve optimal risk profile that
balances benefits of protection against cost of hedging
Bad Reasons for M&A Correct Answers -having to spend
money
-diversification
-ratcheting up earnings
Binomial Option Pricing Correct Answers No Arbitrage
Pricing
-any two assets that have the same future payout with the same
amount of risk, should have the same price
,-to solve for price of option, create mix of assets that give the
same payout as the option.
Binomial Pricing Correct Answers -inverse of the hedge ratio
-increments can be as small as needed
Black-Scholes Pricing Model Correct Answers Attempts to
determine whether an option is fairly priced, over-valued or
undervalued. It considers the price of the underlying stock, the
strike price, time until expiration, volatility of the underlying
stock, interest rates, and the risk-free rate of return.
Call Option Correct Answers the option to buy shares of stock
at a specified time in the future
-investors purchase calls if they expect the underlying security's
price to rise
Carve-outs Correct Answers services that are reimbursed in
addition to the base rate for the patient
-shares of new company are sold through an IPO to new set of
investors to raise money
-independent firms
Cash Mergers Correct Answers acquiring company will use
existing funds or issue new debt to buy the target company.
-in an asset acquisition, the target company will receive cash for
their assets, and use it to pay off any liabilities
-in equity acquisition, the acquirer pays the shareholders cash
for their shares and takes over the assets and liabilities of the
target firm
, Combined value Correct Answers No synergy = sum of two
prior net income
Conglomerate Merger Correct Answers the joining of firms in
completely unrelated industries
Continuous Compounding Correct Answers FV = PV x e ^
(rate * time period)
Corporate Hedging Process Correct Answers Derivations is
part of our commitment to work with you to create financial
solutions
Corporate Hedging Steps Correct Answers 1. Identify risk
-two categories
1. operating risk
2. financial risk
-distinguish between risks company is paid to take and ones
they aren't
-consider materiality of potential loss that might occur
2. Distinguish between Hedging and Speculating
-A properly constructed hedge always lowers risk; choosing not
to hedge puts people at risk
-A reason some managers might not hedge is because not
hedging often goes unnoticed by company's board of directors
-Hedging strategies receive a lot of scrutiny
-Educate board of directors on risk
3. Evaluate the Costs of hedging in Light of the Costs of not
Hedging
-to accurately evaluate the cost of hedging, the risk manager
must consider it in the light of the implicit cost of not hedging
