The average duration of the loans is 10 years.The average duration of the deposits is 3 years. \[\begin{array} { | l | r | l | r | } \hline \text { Consumer loans } & \$ 50 \text { million } & \text { Deposits } & \$ 235 \text { million } \\ \hline \text { Commercial Loans } & \$ 200 \text { million } & \text { Equity } & \$ 15 \text { million } \\ \hline \text { Total Assets } & \$ 250 \text { million } & \text { Total Liabilities \& Equity } & \$ 250 \text { million } \\ \hline \end{array}\] If the exchange rate remains the same, what is the dollar spread earned by the bank at the end of the year?

A) $750,000. B) $1,000,000. C) $1,250,000. D) $1,600,000. E) $1,750,000. A) $750,000. B) $1,000,000. C) $1,250,000. D) $1,600,000. E) $1,750,000.

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 change in the value of the FI's equity for a 1 percent increase in interest rates from the current rates of 10 percent ?

A) -$,979,091. B) -$16,318,182. C) -$15,979,091. D) +$16,318,182. E) +$979,091. A) -$,979,091. B) -$16,318,182. C) -$15,979,091. D) +$16,318,182. E) +$979,091.

Exam 23: Futures and Forwards

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. 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 your 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.

(Multiple Choice)

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Question 21

Futures contracts are standard in terms of all of the following EXCEPT

(Multiple Choice)

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Question 22

If a 16-year 12 percent semi-annual $100,000 T-bond, currently yielding 10 percent, is used to deliver against a 20-year, 8 percent T-bond at 114-16/32, what is the conversion factor? What would the buyer have to pay the seller?

(Multiple Choice)

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Question 23

An FI with a positive duration gap is exposed to interest rate declines and could hedge its interest rate risk by buying forward contracts.

(True/False)

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Question 24

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 the exchange rate falls to US $0.765/C $1? Assume there is no change in interest rates.(Choose the closest answer)

(Multiple Choice)

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Question 25

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.

(True/False)

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Question 26

The process by which the prices on outstanding futures contracts are adjusted each day to reflect current futures market conditions is referred to as marking to market.

(True/False)

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Question 27

The average duration of the loans is 10 years.The average duration of the deposits is 3 years. Consumer loans \ 50 million Deposits \ 235 million Commercial Loans \ 200 million Equity \ 15 million Total Assets \ 250 million Total Liabilities \& Equity \ 250 million If the exchange rate remains the same, what is the dollar spread earned by the bank at the end of the year?

(Multiple Choice)

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Question 28

Which of the following indicates the need to place a hedge?

(Multiple Choice)

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Question 29

The average duration of the loans is 10 years.The average duration of the deposits is 3 years. Consumer loans \ 50 million Deposits \ 235 million Commercial Loans \ 200 million Equity \ 15 million Total Assets \ 250 million Total Liabilities \& Equity \ 250 million What is the change in the value of the FI's equity for a 1 percent increase in interest rates from the current rates of 10 percent ?

(Multiple Choice)

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Question 30

An agreement between a buyer and a seller at time 0 to exchange a standardized, pre-specified asset for cash at a specified later date is characteristic of a

(Multiple Choice)

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Question 31

Catastrophe futures contracts

(Multiple Choice)

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Question 32

An off-balance-sheet forward position is used to hedge the FI's on-balance-sheet risk exposure.

(True/False)

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Question 33

Futures contracts are the primary security that insurance companies and banks use to hedge interest rate risk prior to originating mortgages.

(True/False)

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Question 34

A U.S.FI wishes to hedge a €10,000,000 loan using euro currency futures.Each euro futures contract is for 125,000 euros, and the hedge ratio is 1.40.The loan is payable in one year in euros. How many currency contracts are necessary to hedge this asset?

(Multiple Choice)

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Question 35

What is the purpose of a credit forward agreement?

(Multiple Choice)

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Question 36

In a credit forward agreement hedge, the loss on the balance sheet cash position is offset completely by the gain on the off-balance-sheet credit forward agreement if the characteristics of the benchmark bond and the bank's loan to the borrower are the same.

(True/False)

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Question 37

When performing a linear regression of the relationship between changes in spot prices and changes in futures prices, what does R² = 0 indicate?

(Multiple Choice)

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Question 38

More FIs fail due to credit risk exposure than exposure to either interest rate risk or foreign exchange risk.

(True/False)

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Question 39

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. Your position is exposed to:

(Multiple Choice)

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Question 40

Showing 21 - 40 of 127

Exam 23: Futures and Forwards

Futures contracts are standard in terms of all of the following EXCEPT

If a 16-year 12 percent semi-annual $100,000 T-bond, currently yielding 10 percent, is used to deliver against a 20-year, 8 percent T-bond at 114-16/32, what is the conversion factor? What would the buyer have to pay the seller?

An FI with a positive duration gap is exposed to interest rate declines and could hedge its interest rate risk by buying forward contracts.

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.

The process by which the prices on outstanding futures contracts are adjusted each day to reflect current futures market conditions is referred to as marking to market.

Which of the following indicates the need to place a hedge?

An agreement between a buyer and a seller at time 0 to exchange a standardized, pre-specified asset for cash at a specified later date is characteristic of a

Catastrophe futures contracts

An off-balance-sheet forward position is used to hedge the FI's on-balance-sheet risk exposure.

Futures contracts are the primary security that insurance companies and banks use to hedge interest rate risk prior to originating mortgages.

A U.S.FI wishes to hedge a €10,000,000 loan using euro currency futures.Each euro futures contract is for 125,000 euros, and the hedge ratio is 1.40.The loan is payable in one year in euros. How many currency contracts are necessary to hedge this asset?

What is the purpose of a credit forward agreement?

In a credit forward agreement hedge, the loss on the balance sheet cash position is offset completely by the gain on the off-balance-sheet credit forward agreement if the characteristics of the benchmark bond and the bank's loan to the borrower are the same.

When performing a linear regression of the relationship between changes in spot prices and changes in futures prices, what does R2 = 0 indicate?

More FIs fail due to credit risk exposure than exposure to either interest rate risk or foreign exchange risk.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Fintech Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters

When performing a linear regression of the relationship between changes in spot prices and changes in futures prices, what does R² = 0 indicate?