Exam 9: Exploring Financial Markets and Hedging Strategies

Trading in financial futures by financial institutions (such as commercial banks) is relatively free of restrictions.

Exchange traded put and call options have grown rapidly in recent years and are focused on instruments such as:

According to the liquidity effect an increase in money supply growth relative to money demand in the short run leads to:

Interest rates tend to rise during a period of economic expansion.

Financial futures provide the trader with a near perfect insulation to market risk.

Long-term interest rates typically rise in the late spring through mid-summer (June or July) and fall during the winter months.

Using each of the following definitions, identify which term or concept presented in this chapter matches them. a. Systems of equations designed to predict or explain interest rate movements. b. Securities expected to be offered for sale in future periods. c. Market's expectation concerning future interest rate levels. d. Use of several different forecasting approaches. e. Two borrowers exchange interest payments.

Financial institutions in swap transactions are frequently in a hedged position, meaning that the financial institution both pays and receives both floating and fixed interest rates. Can a financial institution make any money in this position?

Most options on financial instruments are traded on the New York Futures Exchange.

The concept of futures trading is a relatively new idea.

The development of financial futures markets for securities was prompted by:

The principle of convergence suggests that option prices tend to approach the value of the underlying futures contract as the expiration date of the options approaches.

As the delivery date specified in the futures contract draws nearer:

Describe the relationship between changes in economic activity and market interest rates. Why is it that interest rates usually rise during periods of economic expansion and fall when the economy is headed down into a recession?

A swap eliminates all interest-rate risk.

One-year T-bill futures contracts carry denominations of $250,000.

Derivatives have recently come under greater scrutiny due to their possible role in the great credit crisis of 2007-2009.

The notional amount of a swap never changes hands.

How can the marketplace's expectations be used as a guide to anticipate future changes in interest rates? What are the pitfalls in using such an expectations approach as a forecasting tool?

The notion of convergence states that the difference between spot and future prices will approach zero as the length of time between the current and the time in which the option will be traded approaches infinity.