Question 1

The average duration of the loans is 10 years. The average duration of the deposits is 3 years. f/(1 + Rf)  = 0.011]? A) $16,320,960 loss. B) $16,312,320 gain. C) $15,552,750 gain. D) $15,552,750 loss. E) $13,252,250 gain." class="answers-bank-image d-inline" rel="preload" > What is the gain or loss on the futures position using T-Bonds (Duration = 9 years, $96 per $100 face value)  if the shock to interest rates is 1 percent [i.e. ΔR/(1 + R)  = 0.01 and ΔRf/(1 + Rf)  = 0.011]?

Accepted Answer

A)  $16,320,960 loss.
B)  $16,312,320 gain.
C)  $15,552,750 gain.
D)  $15,552,750 loss.
E)  $13,252,250 gain.F) C) and D)
G) D) and E)

Question 2

It is not possible to separate credit risk exposure from the lending process itself.

Accepted Answer

A) True 
 B)False

Question 3

A U.S. bank issues a 1-year, $1 million U.S. CD at 5 percent annual interest to finance a C$1.274 million investment in 2-year fixed-rate Canadian bonds selling at par and paying 7 percent annually. The U.S. bank expects to liquidate its position in 1 year upon maturity of the CD. Spot exchange rates are US$0.78493 per Canadian dollar. If in one year there is no change in either interest rates or exchange rates, what is the end-of-year profit or loss of the U.S. bank's cash position? Assume that annual interest is paid on both the CD and the Canadian bonds on the date of liquidation in exactly one year.

Accepted Answer

A)  Profit of US$20,000.
B)  Loss of C$224,000
C)  Profit of US$50,000.
D)  Profit of C$63,000.
E)  Profit of US$313,000.F) A) and E)
G) D) and E)

Question 4

Immunizing the balance sheet against interest rate risk means that gains (losses) from an off-balance-sheet hedge will exactly offset losses (gains) from the balance sheet position.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following identifies the largest group of derivative contracts as of June 2012?

Accepted Answer

A)  Futures.
B)  Forwards.
C)  Options.
D)  Swaps.
E)  Credit derivatives.F) A) and B)
G) C) and D)

Question 6

Why does basis risk occur?

Accepted Answer

A)  Changes in the spot asset's price are not perfectly correlated with changes in the price of the asset delivered under a forward or futures contract.
B)  The daily marking-to-market process enables an FI manager to close out a futures position by taking an exactly offsetting position.
C)  Spot and futures contracts are traded in different markets with different demand and supply functions.
D)  None of these.
E)  Changes in the spot asset's price are not perfectly correlated with changes in the price of the asset delivered under a forward or futures contract, and spot and futures contracts are traded in different markets with different demand and supply functions.F) C) and D)
G) A) and E)

Question 7

The average duration of the loans is 10 years. The average duration of the deposits is 3 years.  What is the number of T-Bill futures contracts necessary to hedge the balance sheet if the duration of the deliverable T-bills is 0.25 years and the current price of the futures contract is $98 per $100 face value?

Accepted Answer

A)  6,212 contracts.
B)  6,805 contracts.
C)  6,900 contracts.
D)  7,112 contracts.
E)  7,327 contracts.F) All of the above
G) D) and E)

Question 8

A forward contract

Accepted Answer

A)  has more credit risk than a futures contract.
B)  is more standardized than a futures contract.
C)  is marked to market more frequently than a futures contract.
D)  has a shorter time to delivery than a futures contract.
E)  is less risky than a futures contract.F) B) and D)
G) A) and B)

Question 9

Use the following two choices to identify whether each intermediary or entity is a net buyer or net seller of credit derivative securities.
-Mutual funds

Accepted Answer

A)  Net buyer (typically) 
B)  Net seller (typically) C) A) and B)
D) undefined

Question 10

The sensitivity of the price of a futures contract depends on the duration of the deliverable asset underlying the contract.

Accepted Answer

A) True 
 B)False

Question 11

Use the following two choices to identify whether each intermediary or entity is a net buyer or net seller of credit derivative securities.
-Corporations

Accepted Answer

A)  Net buyer (typically) 
B)  Net seller (typically) C) A) and B)
D) undefined

Question 12

A futures contract

Accepted Answer

A)  is tailor-made to fit the needs of the buyer and the seller.
B)  has more credit risk than a forward contract.
C)  is marked to market more frequently than a forward contract.
D)  has a shorter time to delivery than a forward contract.
E)  has more price risk than a forward contract.F) C) and D)
G) A) and B)

Question 13

Hedging selectively only a portion of the balance sheet is an attempt to increase the return of the FI by accepting some level of interest rate risk.

Accepted Answer

A) True 
 B)False

Question 14

Historical analysis of recent changes in exchange rates in both the spot and futures markets for a given currency reveals that spot rates are thirty percent more sensitive than futures prices. Given this information, the hedge ratio for this currency is

Accepted Answer

A)  0.70.
B)  0.77.
C)  1.30.
D)  1.43.
E)  1.86.F) B) and C)
G) None of the above

Question 15

Which of the following is NOT true regarding hedge ratio?

Accepted Answer

A)  When there is no basis risk hedge ratio is equal to one.
B)  When h = 1, both spot and futures are expected to change together by the same absolute amount.
C)  When h = 1, FX risk of the cash position should be hedged dollar for dollar by buying FX futures.
D)  When basis risk is present, the spot and future exchange rates are expected to move imperfectly together.
E)  The FI must sell a greater number of futures when there is basis risk than it has to when basis risk is absent.F) C) and E)
G) C) and D)

Question 16

An FI issued $1 million of 1-year maturity floating rate commercial paper. The commercial paper is repriced every three months at the 91-day Treasury bill rate plus 2 percent. What is the FI's interest rate risk exposure and how can it use financial futures and options to hedge that risk exposure?

Accepted Answer

A)  The FI can hedge its exposure to interest rate increases by selling financial futures.
B)  The FI can hedge its exposure to interest rate decreases by selling financial futures.
C)  The FI can hedge its exposure to interest rate increases by buying financial futures.
D)  The FI can hedge its exposure to interest rate increases by buying call options.
E)  The FI cannot hedge its exposure to interest rate increases or decreases using financial futuresF) A) and B)
G) A) and E)

Question 17

Hedging effectiveness often is measured by the squared correlation between past changes in the spot asset prices and futures prices.

Accepted Answer

A) True 
 B)False

Question 18

Selective hedging that results in an over-hedged position may be regarded as speculative by regulators.

Accepted Answer

A) True 
 B)False

Question 19

Routine hedging will allow the FI to achieve greater return from the assets and liabilities on the balance sheet.

Accepted Answer

A) True 
 B)False

Question 20

Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. If Treasury bond futures prices are currently 89-00/32nds, what is the value of the Treasury bond futures hedge position?

Accepted Answer

A)  $30,000,000.
B)  $28,387,500.
C)  $26,700,000.
D)  $89,000,000.
E)  $890,000.F) B) and C)
G) A) and D)

Exam 22: Futures and Forwards

Selective hedging that results in an over-hedged position may be regarded as speculative by regulators.

Correct Answer
verified

Historical analysis of recent changes in exchange rates in both the spot and futures markets for a given currency reveals that spot rates are thirty percent more sensitive than futures prices. Given this information, the hedge ratio for this currency is

Correct Answer
verified

Hedging effectiveness often is measured by the squared correlation between past changes in the spot asset prices and futures prices.

Correct Answer
verified

Which of the following identifies the largest group of derivative contracts as of June 2012?

Correct Answer
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It is not possible to separate credit risk exposure from the lending process itself.

Correct Answer
verified

Correct Answer
verified

Routine hedging will allow the FI to achieve greater return from the assets and liabilities on the balance sheet.

Correct Answer
verified

A futures contract

Correct Answer
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An FI issued $1 million of 1-year maturity floating rate commercial paper. The commercial paper is repriced every three months at the 91-day Treasury bill rate plus 2 percent. What is the FI's interest rate risk exposure and how can it use financial futures and options to hedge that risk exposure?

Correct Answer
verified

Immunizing the balance sheet against interest rate risk means that gains (losses) from an off-balance-sheet hedge will exactly offset losses (gains) from the balance sheet position.

Correct Answer
verified

Use the following two choices to identify whether each intermediary or entity is a net buyer or net seller of credit derivative securities. -Mutual funds

Correct Answer
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Use the following two choices to identify whether each intermediary or entity is a net buyer or net seller of credit derivative securities. -Corporations

Correct Answer
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Why does basis risk occur?

Correct Answer
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Which of the following is NOT true regarding hedge ratio?

Correct Answer
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Correct Answer
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Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. If Treasury bond futures prices are currently 89-00/32^nds, what is the value of the Treasury bond futures hedge position?

Correct Answer
verified

Hedging selectively only a portion of the balance sheet is an attempt to increase the return of the FI by accepting some level of interest rate risk.

Correct Answer
verified

Correct Answer
verified

A forward contract

Correct Answer
verified

The sensitivity of the price of a futures contract depends on the duration of the deliverable asset underlying the contract.

Correct Answer
verified

Exam 22: Futures and Forwards

Selective hedging that results in an over-hedged position may be regarded as speculative by regulators.

Correct AnswerverifiedShow Answer

Historical analysis of recent changes in exchange rates in both the spot and futures markets for a given currency reveals that spot rates are thirty percent more sensitive than futures prices. Given this information, the hedge ratio for this currency is

Correct AnswerverifiedShow Answer

Hedging effectiveness often is measured by the squared correlation between past changes in the spot asset prices and futures prices.

Correct AnswerverifiedShow Answer

Which of the following identifies the largest group of derivative contracts as of June 2012?

Correct AnswerverifiedShow Answer

It is not possible to separate credit risk exposure from the lending process itself.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Routine hedging will allow the FI to achieve greater return from the assets and liabilities on the balance sheet.

Correct AnswerverifiedShow Answer

A futures contract

Correct AnswerverifiedShow Answer

An FI issued $1 million of 1-year maturity floating rate commercial paper. The commercial paper is repriced every three months at the 91-day Treasury bill rate plus 2 percent. What is the FI's interest rate risk exposure and how can it use financial futures and options to hedge that risk exposure?

Correct AnswerverifiedShow Answer

Immunizing the balance sheet against interest rate risk means that gains (losses) from an off-balance-sheet hedge will exactly offset losses (gains) from the balance sheet position.

Correct AnswerverifiedShow Answer

Use the following two choices to identify whether each intermediary or entity is a net buyer or net seller of credit derivative securities. -Mutual funds

Correct AnswerverifiedShow Answer

Use the following two choices to identify whether each intermediary or entity is a net buyer or net seller of credit derivative securities. -Corporations

Correct AnswerverifiedShow Answer

Why does basis risk occur?

Correct AnswerverifiedShow Answer

Which of the following is NOT true regarding hedge ratio?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. If Treasury bond futures prices are currently 89-00/32nds, what is the value of the Treasury bond futures hedge position?

Correct AnswerverifiedShow Answer

Hedging selectively only a portion of the balance sheet is an attempt to increase the return of the FI by accepting some level of interest rate risk.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A forward contract

Correct AnswerverifiedShow Answer

The sensitivity of the price of a futures contract depends on the duration of the deliverable asset underlying the contract.

Correct AnswerverifiedShow Answer

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Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. If Treasury bond futures prices are currently 89-00/32^nds, what is the value of the Treasury bond futures hedge position?

Correct Answer
verified

Correct Answer
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