Question 1

The basic trading unit for Treasury bonds is:

Accepted Answer

A)  $1 million 
B)  $100,000 
C)  $250,000 
D)  $500,000 
E)  None of the above 
A)  $1 million 
B)  $100,000 
C)  $250,000 
D)  $500,000 
E)  None of the above

Question 2

As the global financial system becomes "smaller"
through technological advances, alliances and mergers among the world's leading securities exchanges are likely to continue.

Accepted Answer

A) True 
 B)False

Question 3

Futures contracts are daily "marked to market"
which means each day the futures exchange clearinghouse sets the price at which they will be traded.

Accepted Answer

A) True 
 B)False

Question 4

A perfect hedge contracts away all risk and creates a situation where any change in the market price is exactly offset by a profit or loss on the futures contract.

Accepted Answer

A) True 
 B)False

Question 5

Explain the meaning of the following terms:

Accepted Answer

a. Liquidity effect
The money-supply liq

Question 6

Which of the following is a true statement?

Accepted Answer

A)  A long hedge involves the purchase of futures contracts before the investor must buy the actual securities 
B)  The purpose of a long hedge is to guarantee a desired yield 
C)  The immediate sale of financial futures contracts is characteristic of a short hedge 
D)  A combined transaction between the spot and futures markets using different types of securities in each is a cross hedge 
E)  All of the above 
A)  A long hedge involves the purchase of futures contracts before the investor must buy the actual securities 
B)  The purpose of a long hedge is to guarantee a desired yield 
C)  The immediate sale of financial futures contracts is characteristic of a short hedge 
D)  A combined transaction between the spot and futures markets using different types of securities in each is a cross hedge 
E)  All of the above

Question 7

Define and explain the use of the following: long hedge, short hedge and cross hedge.

Accepted Answer

Long hedge - purchase of futures contrac

Question 8

Explain the uses of the following instruments: Call options, Put options.

Accepted Answer

A call option is a contract that gives t

Question 9

Interest-rate swaps necessarily reduce credit risk.

Accepted Answer

A) True 
 B)False

Question 10

What are interest-rate swaps? Why were these instruments developed?

Accepted Answer

In an interest rate swap, two participat

Question 11

Stock index futures make it possible to completely offset upward or downward movements in the Dow-Jones Industrial Average, but not in the Standard & Poor's 500 Stock Index.

Accepted Answer

A) True 
 B)False

Question 12

In order to buy an option, one must pay the writer a:

Accepted Answer

A)  Strike price 
B)  Market price 
C)  Margin 
D)  Premium 
E)  Basis 
A)  Strike price 
B)  Market price 
C)  Margin 
D)  Premium 
E)  Basis

Question 13

The Europeans, through firms such as EUREX, are moving into derivatives markets that traditionally have been the province of the US Chicago Board of Trade, (CBOT) and the Chicago Mercantile Exchange CME).

Accepted Answer

A) True 
 B)False

Question 14

If projected money supply growth exceeds projected GNP growth, interest rates are likely to:

Accepted Answer

A)  Rise 
B)  Fall 
C)  Remain stable unless inflation (the Fisher effect) intervenes 
D)  Remain unchanged unless the business cycle turns downward with slower GNP growth 
E)  None of the above 
A)  Rise 
B)  Fall 
C)  Remain stable unless inflation (the Fisher effect) intervenes 
D)  Remain unchanged unless the business cycle turns downward with slower GNP growth 
E)  None of the above

Question 15

In the late 1990's, Japanese government bond yields dropped to the lowest level in modern history.
Reasons for this include:

Accepted Answer

A)  Japan was experiencing a prolonged national recession 
B)  Savers eschew stocks, instead bidding up bond prices 
C)  Business owners had little demand for credit 
D)  All of the above 
E)  Choices A and C only 
A)  Japan was experiencing a prolonged national recession 
B)  Savers eschew stocks, instead bidding up bond prices 
C)  Business owners had little demand for credit 
D)  All of the above 
E)  Choices A and C only

Question 16

During the month just concluded, the prices of U.S. Treasury bonds fluctuated between a price of $95 (based on a $100 par value) and a price of $93. Treasury bond futures over the same period fluctuated between $92 and $88 (based on a $100 par value). How did the basis for T-bond futures contracts change over this period? What was the volatility ratio for T-bond futures for the month just ended? Using the volatility ratio you have just calculated and assuming you wish to hedge for the next 30 days $25 million in Treasury bonds that you currently hold with $100,000 denomination T-bond futures contracts maturing in 90 days, how many T-bond futures contracts will you need to buy to fully cover the $25 million in securities at risk?

Accepted Answer

Assuming the comparative prices quoted o

Question 17

Suppose you could forecast interest rates correctly on a consistent basis. What advantages would this give to you?

Accepted Answer

Of course, being able to forecast where

Question 18

When is a partner to a swap in a long position? A short position? To what kinds of risk is each exposed to?

Accepted Answer

A long position means the swap partner i

Question 19

What is the basic purpose of futures and options trading in securities? Where is most futures and options trading carried out?

Accepted Answer

The basic purpose of futures and options

Question 20

Under federal regulation in the U.S. commercial banks must limit their futures and options trading to hedging real risk-exposure situations.

Accepted Answer

A) True 
 B)False

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

The basic trading unit for Treasury bonds is:

As the global financial system becomes "smaller" through technological advances, alliances and mergers among the world's leading securities exchanges are likely to continue.

Futures contracts are daily "marked to market" which means each day the futures exchange clearinghouse sets the price at which they will be traded.

A perfect hedge contracts away all risk and creates a situation where any change in the market price is exactly offset by a profit or loss on the futures contract.

Explain the meaning of the following terms:

Which of the following is a true statement?

Define and explain the use of the following: long hedge, short hedge and cross hedge.

Explain the uses of the following instruments: Call options, Put options.

Interest-rate swaps necessarily reduce credit risk.

What are interest-rate swaps? Why were these instruments developed?

Stock index futures make it possible to completely offset upward or downward movements in the Dow-Jones Industrial Average, but not in the Standard & Poor's 500 Stock Index.

In order to buy an option, one must pay the writer a:

The Europeans, through firms such as EUREX, are moving into derivatives markets that traditionally have been the province of the US Chicago Board of Trade, (CBOT) and the Chicago Mercantile Exchange CME).

If projected money supply growth exceeds projected GNP growth, interest rates are likely to:

In the late 1990's, Japanese government bond yields dropped to the lowest level in modern history. Reasons for this include:

Suppose you could forecast interest rates correctly on a consistent basis. What advantages would this give to you?

When is a partner to a swap in a long position? A short position? To what kinds of risk is each exposed to?

What is the basic purpose of futures and options trading in securities? Where is most futures and options trading carried out?

Under federal regulation in the U.S. commercial banks must limit their futures and options trading to hedging real risk-exposure situations.

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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