Question 1

Forward contracts are individually negotiated and, therefore, can be unique.

Accepted Answer

A) True 
 B)False

Question 2

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 3

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

Accepted Answer

A) True 
 B)False

Question 4

Which of the following is an example of microhedging asset-side portfolio risk?

Accepted Answer

A) When an FI, attempting to lock in cost of funds to protect itself against a rise in short-term interest rates, takes a short position in futures contracts on CDs. 
B) FI manager trying to pick a futures contract whose underlying deliverable asset is not matched to the asset position being hedged. 
C) When an FI hedges a cash asset on a direct dollar-for-dollar basis with a forward or futures contract. 
D) When an FI manager wants to insulate the value of the institution's bond portfolio fully against a rise in interest rates. 
E) When an FI manager wishes to use futures or other derivative securities to hedge the entire balance sheet duration gap. 
A) When an FI, attempting to lock in cost of funds to protect itself against a rise in short-term interest rates, takes a short position in futures contracts on CDs. 
B) FI manager trying to pick a futures contract whose underlying deliverable asset is not matched to the asset position being hedged. 
C) When an FI hedges a cash asset on a direct dollar-for-dollar basis with a forward or futures contract. 
D) When an FI manager wants to insulate the value of the institution's bond portfolio fully against a rise in interest rates. 
E) When an FI manager wishes to use futures or other derivative securities to hedge the entire balance sheet duration gap.

Question 5

A conversion factor often is used to determine the invoice price on a futures contract when a bond other than the benchmark bond is delivered to the buyer.

Accepted Answer

A) True 
 B)False

Question 6

A perfect hedge, or perfect immunization, seldom occurs.

Accepted Answer

A) True 
 B)False

Question 7

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. How can the portfolio manager use futures markets to protect against the risk exposure of rising interest rates?

Accepted Answer

A) Buy interest rate futures. 
B) Sell currency futures. 
C) Buy currency futures. 
D) Sell interest rate futures. 
E) Sell stock market index futures. 
A) Buy interest rate futures. 
B) Sell currency futures. 
C) Buy currency futures. 
D) Sell interest rate futures. 
E) Sell stock market index futures.

Question 8

If a 12-year, 6.5 percent semi-annual $100,000 T-bond, currently yielding 4.10 percent, is used to deliver against a 6-year, 5 percent T-bond at 110-17/32, what is the conversion factor? What would the buyer have to pay the seller?

Accepted Answer

A) 1.1027; $110,531. 
B) 1.2257; $135,478. 
C) 1.8370; $253,830. 
D) 1.3622; $163,339. 
E) 1.7263; $141,788. 
A) 1.1027; $110,531. 
B) 1.2257; $135,478. 
C) 1.8370; $253,830. 
D) 1.3622; $163,339. 
E) 1.7263; $141,788.

Question 9

Which of the following identifies the largest group of derivative contracts as of 2015?

Accepted Answer

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

Question 10

All bonds that are deliverable under a Treasury bond futures contract have a maturity of 20 years and an interest rate of 8 percent.

Accepted Answer

A) True 
 B)False

Question 11

A naive hedge occurs when

Accepted Answer

A) an FI manager wishes to use futures or other derivative securities to hedge the entire balance sheet duration gap. 
B) a cash asset is hedged on a direct dollar-for-dollar basis with a forward or futures contract. 
C) an FI reduces its interest rate or other risk exposure to the lowest possible level by selling sufficient futures to offset the interest rate risk exposure of its whole balance sheet. 
D) an FI purchases an insurance cover to the extent of 80% of losses arising from adverse movement in asset prices. 
E) All of the options. 
A) an FI manager wishes to use futures or other derivative securities to hedge the entire balance sheet duration gap. 
B) a cash asset is hedged on a direct dollar-for-dollar basis with a forward or futures contract. 
C) an FI reduces its interest rate or other risk exposure to the lowest possible level by selling sufficient futures to offset the interest rate risk exposure of its whole balance sheet. 
D) an FI purchases an insurance cover to the extent of 80% of losses arising from adverse movement in asset prices. 
E) All of the options.

Question 12

The average duration of the loans is 10 years.The average duration of the deposits is 3 years. $$\begin{array} { | l | r | l | r | } 
\hline \text { Consumer loans } & \$ 50 \text { million } & \text { Deposits } & \$ 235 \text { million } \
\hline \text { Commercial Loans } & \$ 200 \text { million } & \text { Equity } & \$ 15 \text { million } \
\hline \text { Total Assets } & \$ 250 \text { million } & \text { Total Liabilities \& Equity } & \$ 250 \text { million } \
\hline
\end{array}$$ If the current (spot) rate for one-year British pound futures is currently at $1.58/? and each contract size is ?62,500, how many contracts are required to be purchased or sold in order to fully hedge against the pound exposure? (Assume no basis risk).

Accepted Answer

A) Sell 1,600 BP futures. 
B) Buy 1,600 BP futures. 
C) Sell 1,712 BP futures. 
D) Buy 2,560 BP futures. 
E) Buy 1,712 BP futures. 
A) Sell 1,600 BP futures. 
B) Buy 1,600 BP futures. 
C) Sell 1,712 BP futures. 
D) Buy 2,560 BP futures. 
E) Buy 1,712 BP futures.

Question 13

Which of the following group of derivative securities had the smallest notational value among the top 25 FIs as of 2015?

Accepted Answer

A) Futures and forwards. 
B) Caps, floors, and collars. 
C) Options. 
D) Swaps. 
E) Credit derivatives. 
A) Futures and forwards. 
B) Caps, floors, and collars. 
C) Options. 
D) Swaps. 
E) Credit derivatives.

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. 
A) 0.70. 
B) 0.77. 
C) 1.30. 
D) 1.43. 
E) 1.86.

Question 15

XYZ Bank lends $20,000,000 to ABC Corporation which has a credit rating of BB.The spread of a BB rated benchmark bond is 2.5 percent over the U.S.Treasury bond of similar maturity.XYZ Bank sells a $20,000,000 one-year credit forward contract to IWILL Insurance Company.At maturity, the spread of the benchmark bond against the Treasury bond is 2.1 percent, and the benchmark bond has a modified duration of 4 years.What is the amount of payment paid by whom to whom at the maturity of the credit forward contract?

Accepted Answer

A) The seller pays the buyer $320,000. 
B) The buyer pays the seller $320,000. 
C) The seller pays the buyer $80,000. 
D) The buyer pays the seller $80,000. 
E) The borrower receives $240,000. 
A) The seller pays the buyer $320,000. 
B) The buyer pays the seller $320,000. 
C) The seller pays the buyer $80,000. 
D) The buyer pays the seller $80,000. 
E) The borrower receives $240,000.

Question 16

The uniform guidelines for banks that trade in futures and forwards require a bank to:

Accepted Answer

A) establish internal guidelines regarding its hedging activity. 
B) establish trading limits. 
C) disclose large contract positions that materially affect bank risk to shareholders and outside investors. 
D) None of the above statements. 
E) All of the above statements. 
A) establish internal guidelines regarding its hedging activity. 
B) establish trading limits. 
C) disclose large contract positions that materially affect bank risk to shareholders and outside investors. 
D) None of the above statements. 
E) All of the above statements.

Question 17

Routine hedging

Accepted Answer

A) is a hedging strategy that occurs on a set, predetermined basis by the FI. 
B) always results in excess returns. 
C) is a strategy to follow when interest rates are abnormally low. 
D) is a strategy used when interest rates are extremely unpredictable. 
E) is a strategy to follow when interest rates are abnormally high. 
A) is a hedging strategy that occurs on a set, predetermined basis by the FI. 
B) always results in excess returns. 
C) is a strategy to follow when interest rates are abnormally low. 
D) is a strategy used when interest rates are extremely unpredictable. 
E) is a strategy to follow when interest rates are abnormally high.

Question 18

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

Question 19

Commercial banks, investment banks, and broker-dealers are the major forward market participants.

Accepted Answer

A) True 
 B)False

Question 20

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 should be the trading price of the BP futures contract at the end of the year in order for the FI to be perfectly hedged? That is, the FI earns its original anticipated spread without any effects of exchange rate changes?

Accepted Answer

A) $1.60/?. 
B) $1.61/?. 
C) $1.62/?. 
D) $1.63/?. 
E) $1.64/?. 
A) $1.60/?. 
B) $1.61/?. 
C) $1.62/?. 
D) $1.63/?. 
E) $1.64/?.

Exam 23: Futures and Forwards

Forward contracts are individually negotiated and, therefore, can be unique.

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.

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

Which of the following is an example of microhedging asset-side portfolio risk?

A conversion factor often is used to determine the invoice price on a futures contract when a bond other than the benchmark bond is delivered to the buyer.

A perfect hedge, or perfect immunization, seldom occurs.

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. How can the portfolio manager use futures markets to protect against the risk exposure of rising interest rates?

If a 12-year, 6.5 percent semi-annual $100,000 T-bond, currently yielding 4.10 percent, is used to deliver against a 6-year, 5 percent T-bond at 110-17/32, what is the conversion factor? What would the buyer have to pay the seller?

Which of the following identifies the largest group of derivative contracts as of 2015?

All bonds that are deliverable under a Treasury bond futures contract have a maturity of 20 years and an interest rate of 8 percent.

A naive hedge occurs when

Which of the following group of derivative securities had the smallest notational value among the top 25 FIs as of 2015?

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

The uniform guidelines for banks that trade in futures and forwards require a bank to:

Routine hedging

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 Treasury bond futures prices are currently 89-00/32nds, what is the value of the Treasury bond futures hedge position?

Commercial banks, investment banks, and broker-dealers are the major forward market participants.

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

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 Treasury bond futures prices are currently 89-00/32^nds, what is the value of the Treasury bond futures hedge position?