Question 1

Barings Brothers collapsed in 1995 due to massive losses from trading derivatives instruments.

Accepted Answer

A) True 
 B)False  True

Question 2

An index amortizing rate swap allows the parties to the swap to change interest rates over the life of the swap but the notional principal does not change.

Accepted Answer

A) True 
 B)False  False

Question 3

If market interest rates rise, the value of a financial futures contract will:

Accepted Answer

A)  Rise 
B)  Fall 
C)  Remain constant because the value is determined by prices in the future 
D)  The change in value depends on the maturity of the futures contract 
E)  None of the above 
A)  Rise 
B)  Fall 
C)  Remain constant because the value is determined by prices in the future 
D)  The change in value depends on the maturity of the futures contract 
E)  None of the above C

Question 4

What is basis? Explain how the basis for a futures contract relates to trading risk.

Accepted Answer

Basis refers to the spread between the c

Question 5

A swap can be effectively hedged against interest-rate risk by:

Accepted Answer

A)  Selling out to another party 
B)  Entering into another swap agreement that is the mirror image of the first swap 
C)  Setting interest-sensitive assets equal to interest-sensitive liabilities 
D)  Setting asset duration equal to liability duration 
E)  None of the above 
A)  Selling out to another party 
B)  Entering into another swap agreement that is the mirror image of the first swap 
C)  Setting interest-sensitive assets equal to interest-sensitive liabilities 
D)  Setting asset duration equal to liability duration 
E)  None of the above

Question 6

The forecasting of interest rates has become a very precise science, reducing the uncertainty faced by financial managers.

Accepted Answer

A) True 
 B)False

Question 7

The LIBOR futures contract trades in $3 million units at the Chicago Mercantile Exchange.

Accepted Answer

A) True 
 B)False

Question 8

The basic trading unit for Treasury notes is a $1 million face value on an 8-percent coupon rate.

Accepted Answer

A) True 
 B)False

Question 9

T-bills were declared eligible for trading in the U.S. financial futures market in January 1976.

Accepted Answer

A) True 
 B)False

Question 10

When cash and futures prices or interest rates move parallel

Accepted Answer

A)  The basis risk is one 
B)  The volatility ratio is zero 
C)  The basis risk is zero 
D)  The volatility ratio is .5 
E)  None of the above 
A)  The basis risk is one 
B)  The volatility ratio is zero 
C)  The basis risk is zero 
D)  The volatility ratio is .5 
E)  None of the above

Question 11

An investment banking firm discovers that 90 days from today, it is due to receive a cash payment from one of its corporate clients of $972,500. The firm's portfolio manager is instructed to plan to invest this new cash for a horizon of three months, after which it will need to be liquidated. Interest rates
are attractive today at 10 percent, but a steep decline is forecast due to a developing recession. The portfolio manager decides to try to guarantee a 9 percent rate of return today on this planned three-month investment of cash.
a. Describe what the manager should do today in the financial futures market. Then, indicate how he will close out the futures position eventually.
b. What are the appropriate (buy-sell) steps for the manager if options on financial futures are to be used? T

Accepted Answer

A.The portfolio manager should buy a 90-

Question 12

Beginning after December 1998, a new FASB rule relating to reporting about derivatives came into existence. The rule's primary requirement compels firms to:

Accepted Answer

A)  Lay off any derivatives exposure prior to 12/31/2004 
B)  Clearly state the book value of derivative contracts and their possible effect on the firm's revenues 
C)  Report the market value of their derivative contracts and adjust earnings to reflect any changes in market value 
D)  All of the above 
E)  Choices B and C only 
A)  Lay off any derivatives exposure prior to 12/31/2004 
B)  Clearly state the book value of derivative contracts and their possible effect on the firm's revenues 
C)  Report the market value of their derivative contracts and adjust earnings to reflect any changes in market value 
D)  All of the above 
E)  Choices B and C only

Question 13

The principal reason for the existence of a futures market is hedging.

Accepted Answer

A) True 
 B)False

Question 14

Short- term interest rates tend to rise during the summer and fall months and to fall over the winter and spring months.

Accepted Answer

A) True 
 B)False

Question 15

If an IAR swap uses LIBOR (the London InterBank Offer Rate) as an interest-rate index, then changes in LIBOR will affect the notional principal involved in the swap.

Accepted Answer

A) True 
 B)False

Question 16

According to the money-supply income effect, if the money supply grows more slowly than planned spending, interest rates will rise.

Accepted Answer

A) True 
 B)False

Question 17

The writer of a call option gains when the market value of the futures contract or security named in the option rises above the strike price.

Accepted Answer

A) True 
 B)False

Question 18

What is interest-rate hedging? What is its goal?

Accepted Answer

Interest-rate hedging refers to the act

Question 19

What risks and costs are inherent in financial futures and options trading?

Accepted Answer

The principal risk in futures and option

Question 20

The principal amount or unit for the Federal funds futures contract traded on the Chicago Board of Trade is:

Accepted Answer

A)  $5 million 
B)  $1 million 
C)  $100,000 
D)  $10 million 
E)  None of the above 
A)  $5 million 
B)  $1 million 
C)  $100,000 
D)  $10 million 
E)  None of the above

Exam 9: Interest-Rate Forecasting and Hedging: Swaps, Financial Futures, and Options

Barings Brothers collapsed in 1995 due to massive losses from trading derivatives instruments.

An index amortizing rate swap allows the parties to the swap to change interest rates over the life of the swap but the notional principal does not change.

If market interest rates rise, the value of a financial futures contract will:

What is basis? Explain how the basis for a futures contract relates to trading risk.

A swap can be effectively hedged against interest-rate risk by:

The forecasting of interest rates has become a very precise science, reducing the uncertainty faced by financial managers.

The LIBOR futures contract trades in $3 million units at the Chicago Mercantile Exchange.

The basic trading unit for Treasury notes is a $1 million face value on an 8-percent coupon rate.

T-bills were declared eligible for trading in the U.S. financial futures market in January 1976.

When cash and futures prices or interest rates move parallel

Beginning after December 1998, a new FASB rule relating to reporting about derivatives came into existence. The rule's primary requirement compels firms to:

The principal reason for the existence of a futures market is hedging.

Short- term interest rates tend to rise during the summer and fall months and to fall over the winter and spring months.

If an IAR swap uses LIBOR (the London InterBank Offer Rate) as an interest-rate index, then changes in LIBOR will affect the notional principal involved in the swap.

According to the money-supply income effect, if the money supply grows more slowly than planned spending, interest rates will rise.

The writer of a call option gains when the market value of the futures contract or security named in the option rises above the strike price.

What is interest-rate hedging? What is its goal?

What risks and costs are inherent in financial futures and options trading?

The principal amount or unit for the Federal funds futures contract traded on the Chicago Board of Trade is:

Functions and Roles of the Financial System in the Global Economy

Financial Assets, Money, Financial Transactions, and Financial Institutions

The Financial Information Marketplace

The Future of the Financial System and the Money and Capital Markets

The Determinants of Interest Rates: Competing Ideas

Measuring and Calculating Interest Rates and Financial Asset Prices

Inflation and Deflation, Yield Curves, and Duration: Impact on Interest Rates and Asset Prices

The Risk Structure of Interest Rates: Defaults, Prepayments, Taxes, and Other Rate-Determining Factors

Introduction to the Money Market and the Roles Played by Governments and Security Dealers

Commercial Banks, Major Corporations, and Federal Credit Agencies in the Money Market

Roles and Services of the Federal Reserve and Other Central Banks Around the World

The Tools and Goals of Central Bank Monetary Policy

The Commercial Banking Industry: Structure, Products, and Management

Nonbank Thrift Institutions: Savings and Loans, Savings Banks, Credit Unions, and Money Market Funds

Mutual Funds, Insurance Companies, Investment Banks, and Other Financial Firms

Regulation of the Financial Institutions Sector

Federal, State, and Local Governments Operating in the Financial Markets

Business Borrowing: Corporate Bonds, Asset-Backed Securities, Bank Loans, and Other Forms of Business Debt

The Market for Corporate

Consumer Lending and Borrowing

The Residential Mortgage Market Stock

International Transactions and Currency Values

International Banking

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