1. Which statement is FALSE?

a) A problem with swaps is the lack of standardized contracts, which limits the development of a secondary market.

b) Paying executives with stock options encourages them to take less risk

c) The coupon rate on Inverse Floaters goes up when interest rates fall

d) Credit Default Swaps pay off when a company goes bankrupt, thus they are like an insurance policy on bonds.

2. Which statement is CORRECT?

a) Risk management makes sense for firms directly engaged in activities that involve commodities whose values can be hedged, and it doesn’t make much sense for most other firms.

b) An option is in the money as long as the option price is positive.

c) Risk management can reduce the volatility of cash flows, and this decreases the probability of bankruptcy.

d) Companies speculate on derivatives in order to reduce their risk.