Question 1

Which of the following statements regarding a short hedge is true?

Accepted Answer

A) A short hedge is when an FI takes a short position in a futures contract when rates re expected to rise; 
B) The FI loses net worth on its balance sheet if rates rise. 
C) A short hedge seeks to hedge the value of its net worth by selling an appropriate number of futures contracts. 
D) None of the above statements are true. 
E) All of the above statements are true. 
A) A short hedge is when an FI takes a short position in a futures contract when rates re expected to rise; 
B) The FI loses net worth on its balance sheet if rates rise. 
C) A short hedge seeks to hedge the value of its net worth by selling an appropriate number of futures contracts. 
D) None of the above statements are true. 
E) All of the above statements are true. E

Question 2

A forward contract has only one payment cash flow that occurs at the time of delivery.

Accepted Answer

A) True 
 B)False  True

Question 3

Macrohedging uses a derivative contract, such as a futures or forward contract, to hedge a particular asset or liability risk.

Accepted Answer

A) True 
 B)False  False

Question 4

Financial futures can be used by FIs to manage

Accepted Answer

A) credit risk. 
B) interest rate risk. 
C) liquidity risk. 
D) foreign exchange risk. 
E) credit risk, interest rate risk, and foreign exchange risk. 
A) credit risk. 
B) interest rate risk. 
C) liquidity risk. 
D) foreign exchange risk. 
E) credit risk, interest rate risk, and foreign exchange risk.

Question 5

The average duration of the loans is 10 years.The average duration of the deposits is 3 years. $$\begin{array} { | l | r | l | r | } 
\hline \text { Consumer loans } & \$ 50 \text { million } & \text { Deposits } & \$ 235 \text { million } \
\hline \text { Commercial Loans } & \$ 200 \text { million } & \text { Equity } & \$ 15 \text { million } \
\hline \text { Total Assets } & \$ 250 \text { million } & \text { Total Liabilities \& Equity } & \$ 250 \text { million } \
\hline
\end{array}$$ What is the number of T-bond futures contracts necessary to hedge the balance sheet if the duration of the deliverable bonds is 9 years and the current price of the futures contract is $96 per $100 face value and if basis risk shows that for every 1 percent shock to interest rates, i.e., ?R/(1 + R) = 0.01, the implied rate on the deliverable bonds in the futures market increases by 1.1 percent, i.e., ?Rf/(1 + Rf) = 0.011?

Accepted Answer

A) 1,500 contracts. 
B) 1,888 contracts. 
C) 2,100 contracts. 
D) 2,408 contracts. 
E) 3,100 contracts. 
A) 1,500 contracts. 
B) 1,888 contracts. 
C) 2,100 contracts. 
D) 2,408 contracts. 
E) 3,100 contracts.

Question 6

The average duration of the loans is 10 years.The average duration of the deposits is 3 years. $$\begin{array} { | l | r | l | r | } 
\hline \text { Consumer loans } & \$ 50 \text { million } & \text { Deposits } & \$ 235 \text { million } \
\hline \text { Commercial Loans } & \$ 200 \text { million } & \text { Equity } & \$ 15 \text { million } \
\hline \text { Total Assets } & \$ 250 \text { million } & \text { Total Liabilities \& Equity } & \$ 250 \text { million } \
\hline
\end{array}$$ What is the leveraged-adjusted duration gap of the bank's portfolio?

Accepted Answer

A) 10 years. 
B) 7.3 years. 
C) 7 years. 
D) 7.18 years. 
E) 3 years. 
A) 10 years. 
B) 7.3 years. 
C) 7 years. 
D) 7.18 years. 
E) 3 years.

Question 7

Selling a credit forward agreement generates a payoff similar to

Accepted Answer

A) selling a call option. 
B) buying a call option. 
C) selling a put option. 
D) buying a put option. 
E) buying forward contracts. 
A) selling a call option. 
B) buying a call option. 
C) selling a put option. 
D) buying a put option. 
E) buying forward contracts.

Question 8

The current price of June $100,000 T-Bonds trading on the Chicago Board of Trade is 109-24.What is the price to be paid if the contract is delivered in June?

Accepted Answer

A) $107,240. 
B) $109,240. 
C) $109,750. 
D) $110,250. 
E) $115,760. 
A) $107,240. 
B) $109,240. 
C) $109,750. 
D) $110,250. 
E) $115,760.

Question 9

Microhedging uses futures or forward contracts to hedge the entire balance sheet duration gap.

Accepted Answer

A) True 
 B)False

Question 10

In a forward contract agreement, the quantity of product to be traded, the time of the actual trade and the price are determined at the time of the agreement.

Accepted Answer

A) True 
 B)False

Question 11

A naïve hedge is when a noncash asset is hedged on an indirect dollar-for-dollar basis with a looking back contract.

Accepted Answer

A) True 
 B)False

Question 12

The average duration of the loans is 10 years.The average duration of the deposits is 3 years. $$\begin{array} { | l | r | l | r | } 
\hline \text { Consumer loans } & \$ 50 \text { million } & \text { Deposits } & \$ 235 \text { million } \
\hline \text { Commercial Loans } & \$ 200 \text { million } & \text { Equity } & \$ 15 \text { million } \
\hline \text { Total Assets } & \$ 250 \text { million } & \text { Total Liabilities \& Equity } & \$ 250 \text { million } \
\hline
\end{array}$$ What is the cash spread earned by the FI if at the end of the year the ? is trading at $1.63/? in the cash market? Again adjust for all exchange rate changes.

Accepted Answer

A) $1,610,000 gain. 
B) $1,610,000 loss. 
C) $2,670,000 loss. 
D) $2,670,000 gain. 
E) $2,390,000 loss. 
A) $1,610,000 gain. 
B) $1,610,000 loss. 
C) $2,670,000 loss. 
D) $2,670,000 gain. 
E) $2,390,000 loss.

Question 13

Conyers Bank holds U.S.Treasury bonds with a book value of $30 million.However, the U.S.Treasury bonds currently are worth $28,387,500. The bank's portfolio manager wants to shorten asset maturities.Which of the following statements is true?

Accepted Answer

A) The portfolio manager is reluctant to sell the bonds outright since the bank will have to take a loss. 
B) The portfolio manager is willing to sell the bonds outright since they are not as valuable as their book value. 
C) The portfolio manager is willing to sell the bonds outright since they are more valuable than their book value. 
D) The portfolio manager is reluctant to sell the bonds outright since the bank will have to pay taxes on the gain. 
E) None of the options. 
A) The portfolio manager is reluctant to sell the bonds outright since the bank will have to take a loss. 
B) The portfolio manager is willing to sell the bonds outright since they are not as valuable as their book value. 
C) The portfolio manager is willing to sell the bonds outright since they are more valuable than their book value. 
D) The portfolio manager is reluctant to sell the bonds outright since the bank will have to pay taxes on the gain. 
E) None of the options.

Question 14

Reducing the number of futures contracts that are needed to hedge a cash position because of the interest income that is generated from reinvesting the marked-to-market cash flows generated by the futures contract is referred to as tail the hedge.

Accepted Answer

A) True 
 B)False

Question 15

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.You expect to liquidate your position in 1 year upon maturity of the CD.Spot exchange rates are US $0.78493 per Canadian dollar. What is the end-of-year profit or loss on the bank's cash position if in one year both Canadian bond rates increase to 7.5 percent and the exchange rate falls to US $0.765 per Canadian dollar (Assume no change in U.S.interest rates.) (Choose the closest answer)

Accepted Answer

A) Loss of US $12,000. 
B) Loss of US $75,000. 
C) Profit of C $9,000. 
D) Profit of US $50,000. 
E) Loss of C $119,000. 
A) Loss of US $12,000. 
B) Loss of US $75,000. 
C) Profit of C $9,000. 
D) Profit of US $50,000. 
E) Loss of C $119,000.

Question 16

The Financial Accounting Standards Board requires that all derivatives be marked-to-market with any losses and gains transparent on FI's financial statements.

Accepted Answer

A) True 
 B)False

Question 17

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. 
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.

Question 18

Federal regulations in the U.S.allow derivatives to be used only by the 25 largest banks.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

Tailing-the-hedge normally requires an FI manager to utilize more futures contracts to hedge a cash position than are warranted by the initial analysis.

Accepted Answer

A) True 
 B)False

Exam 23: Futures and Forwards

Which of the following statements regarding a short hedge is true?

A forward contract has only one payment cash flow that occurs at the time of delivery.

Macrohedging uses a derivative contract, such as a futures or forward contract, to hedge a particular asset or liability risk.

Financial futures can be used by FIs to manage

Selling a credit forward agreement generates a payoff similar to

The current price of June $100,000 T-Bonds trading on the Chicago Board of Trade is 109-24.What is the price to be paid if the contract is delivered in June?

Microhedging uses futures or forward contracts to hedge the entire balance sheet duration gap.

In a forward contract agreement, the quantity of product to be traded, the time of the actual trade and the price are determined at the time of the agreement.

A naïve hedge is when a noncash asset is hedged on an indirect dollar-for-dollar basis with a looking back contract.

Conyers Bank holds U.S.Treasury bonds with a book value of $30 million.However, the U.S.Treasury bonds currently are worth $28,387,500. The bank's portfolio manager wants to shorten asset maturities.Which of the following statements is true?

Reducing the number of futures contracts that are needed to hedge a cash position because of the interest income that is generated from reinvesting the marked-to-market cash flows generated by the futures contract is referred to as tail the hedge.

The Financial Accounting Standards Board requires that all derivatives be marked-to-market with any losses and gains transparent on FI's financial statements.

A futures contract

Federal regulations in the U.S.allow derivatives to be used only by the 25 largest banks.

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

Tailing-the-hedge normally requires an FI manager to utilize more futures contracts to hedge a cash position than are warranted by the initial analysis.

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