Exam 26: Derivatives and Hedging Risk

A bank has a $50 million mortgage bond risk position which it hedges in the Treasury bond futures markets at the Chicago Board of Trade. Approximately how many contracts are needed to be held in the hedge?

Interest rate and currency swaps allow one party to exchange a:

The buyer of a forward contract:

Two key features of futures contracts that make them more in demand than forward contracts are:

Calculate the duration of a 7-year $1,000 zero-coupon bond with a current price of $399.63 and a yield to maturity of 14%.

Duration of a pure discount bond:

In the practical use of credit default swaps, there:

The duration of a 15 year zero coupon bond priced at $182.70 is:

A mortgage banker had made loan commitments for $10 million in 3 months. How many contracts on Treasury bonds futures must the banker write or buy?

If rates in the market fall between now and one month from now, the mortgage banker:

A pure discount bond pays:

Credit default swaps:

A derivative is a financial instrument whose value is determined by:

A futures contract on gold states that buyers and sellers agree to make or take delivery of an ounce of gold for $400 per ounce. The contract expires in 3 months. The current price of gold is $350 per ounce. If the price of gold rises and continues to rise by $1 every day over the 3 month period, then when the contract is settled, the buyer will _____ and the seller will ____.

You have taken a short position in a futures contract on corn at $2.60 per bushel. Over the next 5 days the contract settled at 2.52, 2.57, 2.62, 2.68, 2.70. Before you can reverse your position in the futures market on the fifth day you are notified to accept delivery. What will you receive on delivery and what is the net amount you receive in total?

Suppose you agree to purchase one-ounce of gold for $382 any time over the next month. The current price of gold is $380. The spot price of gold then falls to $377 the next day. If the agreement is represented by a futures contract marking to market on a daily basis as the price changes, what is your cash flow at the end of the business on the next day?

Duration of a coupon paying bond with same maturity is:

You have taken a short position in a futures contract on corn at $2.60 per bushel. Over the next 5 days the contract settled at 2.52, 2.57, 2.62, 2.68, 2.70. You then decide to reverse your position in the futures market on the fifth day at close. What is the net amount you receive at the end of 5 days?

Calculate the duration of a 4-year $1,000 face value bond, which pays 8% coupons annually throughout maturity and has a yield to maturity of 9%.

A Treasury Note with a maturity of 2 years pays interest semi-annually on a 9 percent annual coupon rate. The $1,000 face value is returned at maturity. If the effective annual yield for all maturities is 7 percent annually, what is the current price of the Treasury Note?