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- When you have a fixed investment horizon, it is important to maximize your earnings. You must understand the risks and returns of the security and the risk factors that can affect the price of the bond. If an investor has a fixed investment horizon, what type of security can be used to minimize both the price risk and the reinvestment risk? Does this security protect the real payoff? Explain.A derivative is a financial instrument whose value is derived from the underlying asset. It’s an agreement that has theability to move risk from one party to another. With this in mind, discuss the advantages associated with use of Derivativesas a financial instrument.Which of the following best describes the terms 'long position' and 'short position' in trading? A long position means expecting the asset's price to rise, and a short position means expecting it to fall. A short position is when a trader borrows an asset to sell, hoping to buy it back at a lower price, while a long position is when a trader buys an asset expecting its price to rise. A long position is when a trader sells an asset immediately, while a short position is holding it for a longer period. A long position indicates selling an asset, while a short position indicates buying it.
- An investor's required rate of return is equal to: the risk premium the investor feels is necessary to compensate for the riskiness of the asset. the risk-free rate of interest plus a risk premium. the risk-free rate of interest. the risk-free rate of interest plus an inflation premium.How are derivatives valued on the balance sheet? How is the adjustment to fair value recorded differently for a cash flow hedge versus a fair value hedge? That is, how does the fair value adjustment of each type of hedge affect current period net income and the accounting equation? What are the three criteria that must be met for a derivative to be classified as a hedge? Once entities decide to buy or sell derivatives to hedge economic risks, they then need to decide whether they want to use hedge accounting; it is an election, not a requirement, even when the derivatives are for the economic purpose of hedging. This election is reminiscent of inventory accounting. Just like when a company selects an inventory method, a company is not required to select the accounting method (LIFO, FIFO, weighted average, specific unit) that most closely corresponds with the physical movement of inventory, although they are free to do so. If entities decide to elect hedge accounting, the following…describe the process of short selling. define the theoretical fair value of an asset and relate it to the concept of market efficiency. discuss and relate the concepts of arbitrage and the law of one price. describe how and why risk is transferred from hedgers to speculators in derivative markets.
- The calculation of an investor's Risk Aversion (A) requires us to look at that individual investor's historic behavior in his/her investing history. Why is Risk Aversion also called "price of risk"? Group of answer choices Risk Aversion measures the risk premium that the investor has required for the Capital Market Line Risk Aversion is determined by the excess return over the risk-free asset, as required by the investor Risk Aversion measures the difference in returns required by the investor in the Capital Allocation Line versus the Capital Market Line Risk Aversion measures the amount of return that the investor has required for each unit of risk taken None of the aboveBoth investors and gamblers take on risk. The difference between an investor and a gambler is that an investor Group of answer choices is normally risk neutral requires a risk premium to take on risk knows he or she will not lose money knows the outcomes at the beginning of the holding periodWhether the following statement is true or wrong. Briefly explain your answer. "It is impossible to have an asset that is risk-free for all investors.” [Hint: Consider the relationship between the investment period of investors and asset maturity, inflation and other factors.)
- financial risk management 1. The seller of a put option a not necessarily the seller of the underlying asset.( true / false) 2. Interest rate risk is the potential for investment (....loss/gain..........). that result from a change in the interest rates. If interest rate (rise/fall)..., for instance, the value of the bond or fixed-income instrument will decline.Which of the following is NOT an assumption used in deriving the Capital Asset Pricing Model (CAPM)? Investors can buy and sell all securities at competitive market prices without incurring taxes or transactions cost and can borrow and lend at the risk-free interest rate Investors hold only efficient portfolios of traded securities. Investors have homogeneous expectations regarding the volatilities, correlation, and expected returns of securities. Investors have homogeneous risk averse preferences toward taking on risk.Which of the following is not a characteristic of an efficient market? Investors can frequently make profits by predicting asset market prices that are different from intrinsic values. The market value of all securities at any one instant in time fully reflect all available information. Investors act rationally. The forces of demand and supply work to maintain that the security's market price and its intrinsic value are in equilibrium.
