Exam 9: Exploring Financial Markets and Hedging Strategies

A key feature of the futures market that allows the hedging process to transfer risk effectively is the fact that prices in the spot market are generally correlated with prices in the futures market.

What does each of the following parties occupy position in the swap market ? a. INTEX Corporation pays a fixed interest rate of 9 percent and receives a floating interest rate equal to the 3- month Treasury bill rate. b. Cross Timbers International, Ltd. pays out an interest rate based on the 6 - month LIBOR rate and receives a long-term, fixed rate of 10 percent. c. Montgomery Securities pays out and also receives an interest rate based upon a flexible 12-month LIBOR interest rate and also receives a fixed rate of 9.5 percent, while paying out a fixed rate of 9.3 percent.

An option contract gives the buyer the right to sell a commodity or security at a set price on or before expiration of the contract.

A key feature of the futures market that allows the hedging process to transfer risk effectively is the fact that:

Long-term securities as a rule carry more principal risk than short-term securities.

The writer of a put option benefits if the market value of the futures contract or security stays below the option's strike price.

The denomination for 90-day T-bill contracts is:

Regarding a call option and a put option, explain each option's purpose and describe what the option writer is obligated to do for each.

Which of the following instruments is not generally traded in the financial futures market?

Cross-hedging is characterized by using different types of securities in the spot and futures markets.

The principal measure of risk in financial futures is the:

When interest rates rise, asset prices normally fall and this is particularly true of fixed income securities.

The buyer of a put option on Treasury bonds:

The advantage of hedging is that it significantly reduces risk.

If the economy is experiencing an economic boom, interest rates will likely:

The measure of the nation's money supply that includes only currency and coin held by the public plus transaction (payments) accounts is known as:

Hedging essentially involves adopting equal:

The basis for a futures contract is the:

Most financial futures trading centers on U.S.T-bill contracts.

The futures markets work to offset risk, because the risk of change in basis is generally: