Exam 9: Exploring Financial Markets and Hedging Strategies

The risk of futures trading is the risk of changes in the basis.

A contract which gives the buyer the right to buy a security at a set price on or before the contract's expiration date is called:

Airbag swaps often induce both rate ceilings and floors, protecting the participants against losses from rising market interest rates.

What leading financial institution can offset or dampen seasonal interest-rate changes?

Most terms of trade for futures contracts are completely controlled by the various exchanges.

Jefferson County Alabama experienced fiscal troubles due to the amount of bad swaps they engaged in.

According to the Fisher effect, if the rate of expected inflation decreases, the real rate must fall and the nominal rate also declines.

Hedging may be compared to insurance in that it helps to protect against certain kinds of risk exposure.

The result of an interest-rate swap is usually a lower interest rate for both swap partners and a better balance between cash inflows and outflows for both parties to the swap.

A perfect hedge is rare.

One disadvantage of the financial futures market is that it may prohibit financial institutions from extending increased amounts of credit.

Which of the following is true regarding U.S. Treasury bonds traded in the futures market?

Interest rate swaps represent iron clad agreements between two borrowers, so there is never any real risk related to the performance of your partner.

The most popular exchange-traded option on a capital market instrument is:

For what reasons are interest rates so difficult to forecast accurately?

Hedging can potentially reduce risk, according to the textbook.

Which rises or falls at a faster-rate - long-term interest rates or short-term interest rates? Can you explain why?

Most American style options are held to expiration.

Research has increasingly pointed towards time patterns in market interest rates that come close to a random walk, that is, it can be predicted on a consistent basis.

A call option grants the buyer the right to purchase a specific number of securities on or before an expiration date at a specified price.