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FIN 470 EXAM 1 STUDY GUIDE QUESTIONS WITH ACCURATE ANSWERS

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Are option payments linear? correct answer No Basis risk correct answer spot price minus futures price Call holder payoff (not accounting premium) correct answer Gross Profit Call holder payoff (with premium) correct answer Net Profit Can hedging add risk correct answer Basis risk, imperfect hedges, virtically integrated industries/firms Cross Hedge correct answer Fututes contract does not match asset ex: hedge price of jet fuel with futures on crude oil Derivative correct answer Legal contract whose value depends on the values of other underlying assets Futures contract correct answer an agreement to buy or sell an asset at a certain time in the future for a certain price Hedge correct answer Trade designed to reduce a type of risk Hedge ratio correct answer size of position in futures/size of exposure

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FIN 470 EXAM 1 STUDY GUIDE QUESTIONS WITH
ACCURATE ANSWERS
Are option payments linear? correct answer No


Basis risk correct answer spot price minus futures price


Call holder payoff (not accounting premium) correct answer Gross Profit


Call holder payoff (with premium) correct answer Net Profit


Can hedging add risk correct answer Basis risk, imperfect hedges, virtically
integrated industries/firms


Cross Hedge correct answer Fututes contract does not match asset
ex: hedge price of jet fuel with futures on crude oil


Derivative correct answer Legal contract whose value depends on the values of
other underlying assets


Futures contract correct answer an agreement to buy or sell an asset at a certain
time in the future for a certain price


Hedge correct answer Trade designed to reduce a type of risk


Hedge ratio correct answer size of position in futures/size of exposure

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