1. Does risk management create value? The answer is Yes.

How
does risk management create value from the viewpoint of
managerial motivation?
(You have to explain at least two different motivations)

2. Suppose there is a one-year project. At the end of the year,the

project will terminate and all cash will be paid out to the suppliers
of capital. Thw project will require $2,000 of initial investment
and will be worth $4,000 with probability 0.6 or $1,000 with
probability 0.4 before interest and taxes. The company decides to
finance 30% of debt and the coupon rate is 10%. The tax rate is
20% and return on assets is 15%. What is the value of equity?
What is the value of debt?
3. Please explain why risk management supports internal financing?
Why is risk management consistent with the expectation of
pecking order theory?
RMNI
:debt
RM
4. One percent of the population has a particular disease. A test is
developed for the disease. The positive result means that the
person has the disease. However, 5% of positive results are false.
In addition, 3% of the negative results are false.
a. What is the probability that Jacky (a random selected person)
test positive?
b. Jacky just got the bad news that the test came back positive;
what is the probability that Jacky has the disease?
a.1%*95%+99%*5%=5.9%
b.1%*95%/5.9%=16.1%
5. There are many instruments that can be used in managing
financial risk, such as options, futures, forward contracts, and
swaps. Please explain the different characteristics among them.
:
:
: OTC

6. Derivatives are usually used to manage risk, so there are many

advantages of derivatives relative to their underlying. Please list

at least three advantages of derivatives compared with their

underlying.
Derivatives underlying
underlying

7. A survey data show that among 1221 female murder victims
between 1984 and 1988, 44% were killed by their husbands or
lovers. Only 14% were killed by strangers. Can you say that
marriage is favorable to murder? Why?
No,44%(1221 44%),(
) murder 44%
8. There are two types of hedge accounting: fair value hedge and
cash flow hedge. What are the differences between these two
accounting principles? (No need to show accounting entries, just
explain the concepts)
9. If you are a CEO in an airline Co., and you expect that the jet fuel
price will rise in near future. Please explain the consequences
and effect on profit with respect to different outcomes (jet fuel
price increases or decreases).
belief
Fuel likely increase
action
hedge
Do not hedge
outcome
increase
decrease
increase decrease
Price
Fuel cost
Benefit

increase
increase
from
avoided
falling
cost
Effect on
Profit
Loss not
Profit
Profit
profit
protected
show
reduced
increase
10. Please describe the better definition of risk and what is the risk
management?
Risk: