Question 1

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. 
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.

Question 2

What does a low value of R2 indicate when performing a linear regression of the relationship between changes in spot prices and changes in futures prices?

Accepted Answer

A) It means the degree of confidence increases in the use of futures contracts, with a given hedge ratio estimate, to hedge cash asset-risk position. 
B) It means that we have little confidence that the slope coefficient from the regression is actually the true hedge ratio. 
C) It indicates that there is no statistical association at all between spot rates and future prices. 
D) It indicates that the regression line does not fit the scatter of observations. 
E) It indicates a low value of hedging ineffectiveness. 
A) It means the degree of confidence increases in the use of futures contracts, with a given hedge ratio estimate, to hedge cash asset-risk position. 
B) It means that we have little confidence that the slope coefficient from the regression is actually the true hedge ratio. 
C) It indicates that there is no statistical association at all between spot rates and future prices. 
D) It indicates that the regression line does not fit the scatter of observations. 
E) It indicates a low value of hedging ineffectiveness.

Question 3

Selective hedging occurs by reducing the interest rate risk by selling sufficient futures contracts to offset the interest rate risk exposure of a portion of the cash positions on the balance sheet.

Accepted Answer

A) True 
 B)False

Question 4

As of 2015, commercial banks held more forward contracts than futures contracts for trading.

Accepted Answer

A) True 
 B)False

Question 5

An adjustment for basis risk with a value of "br" less than one means that the percent change in the spot rates is greater than the change in rate in the deliverable bond in the futures market.

Accepted Answer

A) True 
 B)False

Question 6

The average duration of the loans is 10 years.The average duration of the deposits is 3 years. $$\begin{array} { | l | r | l | r | } 
\hline \text { Consumer loans } & \$ 50 \text { million } & \text { Deposits } & \$ 235 \text { million } \
\hline \text { Commercial Loans } & \$ 200 \text { million } & \text { Equity } & \$ 15 \text { million } \
\hline \text { Total Assets } & \$ 250 \text { million } & \text { Total Liabilities \& Equity } & \$ 250 \text { million } \
\hline
\end{array}$$ Assume that the hedge was placed as indicated in a prior question, and that the BP futures contract is trading at $1.62/?.Assume the futures contract has some days remaining to maturity.What will be the gain or loss on the hedge if it is unwound at this price?

Accepted Answer

A) $4,280,000 loss. 
B) $4,000,000 loss. 
C) $4,280,000 gain. 
D) $4,000,000 gain. 
E) $6,400,000 gain. 
A) $4,280,000 loss. 
B) $4,000,000 loss. 
C) $4,280,000 gain. 
D) $4,000,000 gain. 
E) $6,400,000 gain.

Question 7

The primary benefit of a futures exchange is

Accepted Answer

A) always knowing its exact location. 
B) indemnifying counterparties against credit or default risk. 
C) guarantee of trading volume. 
D) intervention on the trader's behalf with government regulators. 
E) availability of free legal services. 
A) always knowing its exact location. 
B) indemnifying counterparties against credit or default risk. 
C) guarantee of trading volume. 
D) intervention on the trader's behalf with government regulators. 
E) availability of free legal services.

A forward contract

What does a low value of R² indicate when performing a linear regression of the relationship between changes in spot prices and changes in futures prices?

Selective hedging occurs by reducing the interest rate risk by selling sufficient futures contracts to offset the interest rate risk exposure of a portion of the cash positions on the balance sheet.

As of 2015, commercial banks held more forward contracts than futures contracts for trading.

An adjustment for basis risk with a value of "br" less than one means that the percent change in the spot rates is greater than the change in rate in the deliverable bond in the futures market.

The primary benefit of a futures exchange is

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

Exam 23: Futures and Forwards

A forward contract

What does a low value of R2 indicate when performing a linear regression of the relationship between changes in spot prices and changes in futures prices?

Selective hedging occurs by reducing the interest rate risk by selling sufficient futures contracts to offset the interest rate risk exposure of a portion of the cash positions on the balance sheet.

As of 2015, commercial banks held more forward contracts than futures contracts for trading.

An adjustment for basis risk with a value of "br" less than one means that the percent change in the spot rates is greater than the change in rate in the deliverable bond in the futures market.

The primary benefit of a futures exchange is

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

What does a low value of R² indicate when performing a linear regression of the relationship between changes in spot prices and changes in futures prices?