Exam 23: Futures and Forwards

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. Assume that the portfolio manager sells the bonds at a price of 87-05/32, and that she closes out the futures hedge position at a price of 81-17/32.What will be the net gain or loss on the entire bond transaction from the time that the hedge was placed?

Why does basis risk occur?

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. If the portfolio manager put on the hedge when T-bond futures were quoted at 89-00/32^nds, what is the profit/loss on the futures position if the settlement price is 81-27/32^nds?

The number of futures contracts that an FI should buy or sell in a macrohedge depends on the

A forward contract specifies immediate delivery for immediate payment.

Catastrophe futures are designed to hedge extreme losses of natural disasters for property-casualty insurance companies.

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 you wanted to hedge your bank's risk exposure, what hedge position would you take?

The covariance of the change in spot exchange rates and the change in futures exchange rates is 0.6606, and the variance of the change in futures exchange rates is 0.6060.The variance of the change in spot exchange rates is 0.9090.What is the degree of hedging effectiveness?

91-day Treasury bill rates = 9.71 percent 91-day Treasury bill futures rates = 9.66 percent (Reminder: Treasury bill prices are calculated using the following formula: P = FV × (1 - d_t/360) Where P = price, FV = face value, d = discount yield, and t = days until maturity.) What is the basis on the T-bill futures contract?

Who are the common buyers of credit forwards?

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. If T-bond futures prices decrease to 81-27/32^nds, what is the value of the futures hedge position?

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?

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

A credit forward agreement specifies a credit spread on a benchmark U.S.Treasury bond.

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 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?

The Volcker Rule, implemented in April 2014, resulted in only the investment banking arm of a depository institutions to engage in proprietary trading.

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 net gain or loss on the loan given that the exchange rates at the time of repayment were $1.63/? in the cash market and 1.62/? in the futures market? Assume that the futures position is opened and unwound as stated in previous question.

An FI has reduced its interest rate risk exposure to the lowest possible level by selling sufficient futures to offset the risk exposure of its whole balance sheet or cash positions in each asset and liability.The FI is involved in

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 Canadian bond rates increase to 7.5 percent? Assume no change in either current U.S.interest rates or current exchange rates.(Choose the closest answer)

As of 2015, U.S.commercial banks held over $42 trillion of forward contracts that were listed for trading on the Chicago Mercantile exchange.