Question 1

Forward contracts are individually negotiated and, therefore, can be unique.

Accepted Answer

A) True 
 B)False

Question 2

Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. If the portfolio manager put on the hedge when T-bond futures were quoted at 89-00/32nds, what is the profit/loss on the futures position if the settlement price is 81-27/32nds?

Accepted Answer

A) Profit of $2,146,875. 
B) Loss of $2,146,875. 
C) Profit of $1,270,000. 
D) Loss of $1,270,000. 
E) Loss of $812,700. 
A) Profit of $2,146,875. 
B) Loss of $2,146,875. 
C) Profit of $1,270,000. 
D) Loss of $1,270,000. 
E) Loss of $812,700.

Question 3

Futures contracts are standard in terms of all of the following EXCEPT

Accepted Answer

A) contract size. 
B) delivery month. 
C) specific asset to be delivered. 
D) trading hours. 
E) daily price limits. 
A) contract size. 
B) delivery month. 
C) specific asset to be delivered. 
D) trading hours. 
E) daily price limits.

Question 4

A U.S. bank issues a 1-year, $1 million U.S. CD at 5 percent annual interest to finance a C$1.274 million investment in 2-year fixed-rate Canadian bonds selling at par and paying 7 percent annually. The U.S. bank expects to liquidate its position in 1 year upon maturity of the CD. Spot exchange rates are US$0.78493 per Canadian dollar. What is the end-of-year profit or loss on the bank's cash position if in one year both Canadian bond rates increase to 7.5 percent and the exchange rate falls to US$0.765 per Canadian dollar (Assume no change in U.S. interest rates.) (Choose the closest answer)

Accepted Answer

A) Loss of US$12,000. 
B) Loss of US$75,000. 
C) Profit of C$9,000. 
D) Profit of US$50,000. 
E) Loss of C$119,000. 
A) Loss of US$12,000. 
B) Loss of US$75,000. 
C) Profit of C$9,000. 
D) Profit of US$50,000. 
E) Loss of C$119,000.

Question 5

An agreement between a buyer and a seller at time 0 where the seller of an asset agrees to deliver an asset immediately and the buyer agrees to pay for the asset immediately is the characteristic of a

Accepted Answer

A) spot contract. 
B) forward contract. 
C) futures contract. 
D) put options contract. 
E) call options contract. 
A) spot contract. 
B) forward contract. 
C) futures contract. 
D) put options contract. 
E) call options contract.

Question 6

Delivery of the underlying asset almost always occurs in the futures market.

Accepted Answer

A) True 
 B)False

Question 7

A credit forward is a forward agreement that

Accepted Answer

A) hedges against a decrease in default risk on a loan after the loan rate is determined and the loan issued. 
B) hedges against an increase in default risk on a loan before the loan rate is determined and the loan issued. 
C) hedges against an increase in default risk on a loan after the loan rate is determined and the loan issued. 
D) hedges against a decrease in default risk on a loan before the loan rate is determined and the loan issued. 
E) hedges against an increase in default risk on a loan after the loan rate is determined and before the loan is issued. 
A) hedges against a decrease in default risk on a loan after the loan rate is determined and the loan issued. 
B) hedges against an increase in default risk on a loan before the loan rate is determined and the loan issued. 
C) hedges against an increase in default risk on a loan after the loan rate is determined and the loan issued. 
D) hedges against a decrease in default risk on a loan before the loan rate is determined and the loan issued. 
E) hedges against an increase in default risk on a loan after the loan rate is determined and before the loan is issued.

Question 8

The current price of June $100,000 T-Bonds trading on the Chicago Board of Trade is 109-24. What is the price to be paid if the contract is delivered in June?

Accepted Answer

A) $107,240. 
B) $109,240. 
C) $109,750. 
D) $110,250. 
E) $115,760. 
A) $107,240. 
B) $109,240. 
C) $109,750. 
D) $110,250. 
E) $115,760.

Question 9

Derivative contracts allow an FI to manage interest rate and foreign exchange risk.

Accepted Answer

A) True 
 B)False

Question 10

Use the following two choices to identify whether each intermediary or entity is a net buyer or net seller of credit derivative securities.
-Mutual funds

Accepted Answer

A) Net buyer (typically) 
B) Net seller (typically) 
A) Net buyer (typically) 
B) Net seller (typically)

Question 11

Basis risk occurs when the underlying security in the futures contract is not the same asset as the cash asset on the balance sheet.

Accepted Answer

A) True 
 B)False

Question 12

The use of futures contracts by banks is subject to risk-based capital guidelines through the off-balance-sheet risk calculations for risk-based capital.

Accepted Answer

A) True 
 B)False

Question 13

The covariance of the change in spot exchange rates and the change in futures exchange rates is 0.6060, and the variance of the change in futures exchange rates is 0.5050. What is the estimated hedge ratio for this currency?

Accepted Answer

A) 0.306. 
B) 0.694. 
C) 1.440. 
D) 1.200. 
E) 0.833. 
A) 0.306. 
B) 0.694. 
C) 1.440. 
D) 1.200. 
E) 0.833.

Question 14

What is overhedging?

Accepted Answer

A) Selectively hedging a proportion of an FI's balance sheet position. 
B) Choosing to bear some interest rate risk as well as credit and FX risks. 
C) Reducing the risk to the lowest level possible. 
D) Using more hedge vehicles than is necessary to offset the risk in the cash asset. 
E) Partially hedging the individual assets and liabilities. 
A) Selectively hedging a proportion of an FI's balance sheet position. 
B) Choosing to bear some interest rate risk as well as credit and FX risks. 
C) Reducing the risk to the lowest level possible. 
D) Using more hedge vehicles than is necessary to offset the risk in the cash asset. 
E) Partially hedging the individual assets and liabilities.

Question 15

Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. The bank's portfolio manager wants to shorten asset maturities. Which of the following statements is true?

Accepted Answer

A) The portfolio manager is reluctant to sell the bonds outright since the bank will have to take a loss. 
B) The portfolio manager is willing to sell the bonds outright since they are not as valuable as their book value. 
C) The portfolio manager is willing to sell the bonds outright since they are more valuable than their book value. 
D) The portfolio manager is reluctant to sell the bonds outright since the bank will have to pay taxes on the gain. 
E) None of these. 
A) The portfolio manager is reluctant to sell the bonds outright since the bank will have to take a loss. 
B) The portfolio manager is willing to sell the bonds outright since they are not as valuable as their book value. 
C) The portfolio manager is willing to sell the bonds outright since they are more valuable than their book value. 
D) The portfolio manager is reluctant to sell the bonds outright since the bank will have to pay taxes on the gain. 
E) None of these.

Question 16

Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. If T-bond futures prices decrease to 81-27/32nds, what is the value of the futures hedge position?

Accepted Answer

A) $81,270,000. 
B) $24,553,125. 
C) $26,700,000. 
D) $812,700. 
E) $28,387,500. 
A) $81,270,000. 
B) $24,553,125. 
C) $26,700,000. 
D) $812,700. 
E) $28,387,500.

Question 17

An FI has a 1-year 8-percent US$160 million loan financed with a 1-year 7-percent UK£100 million CD. The current exchange rate is $1.60/£. What is the cash spread earned by the FI if at the end of the year the £ is trading at $1.63/£ in the cash market? Again adjust for all exchange rate changes.

Accepted Answer

A) $1,610,000 gain. 
B) $1,610,000 loss. 
C) $2,670,000 loss. 
D) $2,670,000 gain. 
E) $2,390,000 loss. 
A) $1,610,000 gain. 
B) $1,610,000 loss. 
C) $2,670,000 loss. 
D) $2,670,000 gain. 
E) $2,390,000 loss.

Question 18

The covariance of the change in spot exchange rates and the change in futures exchange rates is 0.6060, and the variance of the change in futures exchange rates is 0.5050. What is the estimated hedge ratio for this currency?

Accepted Answer

A) 0.306. 
B) 0.694. 
C) 1.440. 
D) 1.200. 
E) 0.833. 
A) 0.306. 
B) 0.694. 
C) 1.440. 
D) 1.200. 
E) 0.833.

Question 19

An FI has a 1-year 8-percent US$160 million loan financed with a 1-year 7-percent UK£100 million CD. The current exchange rate is $1.60/£. Assume that the hedge was placed as indicated in a prior question, and that the BP futures contract is trading at $1.62/£. Assume the futures contract has some days remaining to maturity. What will be the gain or loss on the hedge if it is unwound at this price?

Accepted Answer

A) $4,280,000 loss. 
B) $4,000,000 loss. 
C) $4,280,000 gain. 
D) $4,000,000 gain. 
E) $6,400,000 gain. 
A) $4,280,000 loss. 
B) $4,000,000 loss. 
C) $4,280,000 gain. 
D) $4,000,000 gain. 
E) $6,400,000 gain.

Question 20

Forward contracts are individually negotiated and, therefore, can be unique.

Accepted Answer

A) True 
 B)False

Exam 22: Futures and Forwards

Forward contracts are individually negotiated and, therefore, can be unique.

Futures contracts are standard in terms of all of the following EXCEPT

An agreement between a buyer and a seller at time 0 where the seller of an asset agrees to deliver an asset immediately and the buyer agrees to pay for the asset immediately is the characteristic of a

Delivery of the underlying asset almost always occurs in the futures market.

A credit forward is a forward agreement that

The current price of June $100,000 T-Bonds trading on the Chicago Board of Trade is 109-24. What is the price to be paid if the contract is delivered in June?

Derivative contracts allow an FI to manage interest rate and foreign exchange risk.

Use the following two choices to identify whether each intermediary or entity is a net buyer or net seller of credit derivative securities. -Mutual funds

Basis risk occurs when the underlying security in the futures contract is not the same asset as the cash asset on the balance sheet.

The use of futures contracts by banks is subject to risk-based capital guidelines through the off-balance-sheet risk calculations for risk-based capital.

The covariance of the change in spot exchange rates and the change in futures exchange rates is 0.6060, and the variance of the change in futures exchange rates is 0.5050. What is the estimated hedge ratio for this currency?

What is overhedging?

Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. The bank's portfolio manager wants to shorten asset maturities. Which of the following statements is true?

Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. If T-bond futures prices decrease to 81-27/32nds, what is the value of the futures hedge position?

The covariance of the change in spot exchange rates and the change in futures exchange rates is 0.6060, and the variance of the change in futures exchange rates is 0.5050. What is the estimated hedge ratio for this currency?

Forward contracts are individually negotiated and, therefore, can be unique.

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Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. If T-bond futures prices decrease to 81-27/32^nds, what is the value of the futures hedge position?