Question 1

How is a hedge ratio commonly determined?

Accepted Answer

A) By discounting the optimal number of futures to sell per $1 of cash position using the yield involved. 
B) By using the ratio of the most recent spot and futures price changes. 
C) By running an ordinary least squares regression of changes in spot prices on changes in futures prices. 
D) By using the conversion factor. 
E) By squaring the correlation between past changes in spot asset prices and futures prices. 
A) By discounting the optimal number of futures to sell per $1 of cash position using the yield involved. 
B) By using the ratio of the most recent spot and futures price changes. 
C) By running an ordinary least squares regression of changes in spot prices on changes in futures prices. 
D) By using the conversion factor. 
E) By squaring the correlation between past changes in spot asset prices and futures prices.

Question 2

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. The U.S. bank's position is exposed to:

Accepted Answer

A) interest rate risk only. 
B) credit risk only. 
C) exchange rate risk only. 
D) interest rate and exchange rate risk only. 
E) interest rate risk, exchange rate risk, and credit risk. 
A) interest rate risk only. 
B) credit risk only. 
C) exchange rate risk only. 
D) interest rate and exchange rate risk only. 
E) interest rate risk, exchange rate risk, and credit risk.

Question 3

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

Accepted Answer

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

Question 4

Selective hedging occurs by reducing the interest rate risk by selling sufficient futures contracts to offset the interest rate risk exposure of a portion of the cash positions on the balance sheet.

Accepted Answer

A) True 
 B)False

Question 5

More FIs fail due to credit risk exposure than exposure to either interest rate risk or foreign exchange risk.

Accepted Answer

A) True 
 B)False

Question 6

A futures contract has only one payment cash flow that occurs at the time of delivery.

Accepted Answer

A) True 
 B)False

Question 7

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 Canadian bond rates increase to 7.5 percent? Assume no change in either current U.S. interest rates or current exchange rates. (Choose the closest answer)

Accepted Answer

A) Loss of US$5,000. 
B) Profit of US$15,000. 
C) Loss of C$119,000. 
D) Profit of C$50,000. 
E) Loss of C$50,000. 
A) Loss of US$5,000. 
B) Profit of US$15,000. 
C) Loss of C$119,000. 
D) Profit of C$50,000. 
E) Loss of C$50,000.

Question 8

A spot contract specifies deferred delivery and payment.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is an example of microhedging asset-side portfolio risk?

Accepted Answer

A) When an FI, attempting to lock in cost of funds to protect itself against a rise in short-term interest rates, takes a short position in futures contracts on CDs. 
B) FI manager trying to pick a futures contract whose underlying deliverable asset is not matched to the asset position being hedged. 
C) When an FI hedges a cash asset on a direct dollar-for-dollar basis with a forward or futures contract. 
D) When an FI manager wants to insulate the value of the institution's bond portfolio fully against a rise in interest rates. 
E) When an FI manager wishes to use futures or other derivative securities to hedge the entire balance sheet duration gap. 
A) When an FI, attempting to lock in cost of funds to protect itself against a rise in short-term interest rates, takes a short position in futures contracts on CDs. 
B) FI manager trying to pick a futures contract whose underlying deliverable asset is not matched to the asset position being hedged. 
C) When an FI hedges a cash asset on a direct dollar-for-dollar basis with a forward or futures contract. 
D) When an FI manager wants to insulate the value of the institution's bond portfolio fully against a rise in interest rates. 
E) When an FI manager wishes to use futures or other derivative securities to hedge the entire balance sheet duration gap.

Question 10

A naive hedge occurs when

Accepted Answer

A) an FI manager wishes to use futures or other derivative securities to hedge the entire balance sheet duration gap. 
B) a cash asset is hedged on a direct dollar-for-dollar basis with a forward or futures contract. 
C) an FI reduces its interest rate or other risk exposure to the lowest possible level by selling sufficient futures to offset the interest rate risk exposure of its whole balance sheet. 
D) an FI purchases an insurance cover to the extent of 80% of losses arising from adverse movement in asset prices. 
E) All of these. 
A) an FI manager wishes to use futures or other derivative securities to hedge the entire balance sheet duration gap. 
B) a cash asset is hedged on a direct dollar-for-dollar basis with a forward or futures contract. 
C) an FI reduces its interest rate or other risk exposure to the lowest possible level by selling sufficient futures to offset the interest rate risk exposure of its whole balance sheet. 
D) an FI purchases an insurance cover to the extent of 80% of losses arising from adverse movement in asset prices. 
E) All of these.

Question 11

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

Accepted Answer

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

Question 12

Financial futures can be used by FIs to manage

Accepted Answer

A) credit risk. 
B) interest rate risk. 
C) liquidity risk. 
D) foreign exchange risk. 
E) credit risk, interest rate risk, and foreign exchange risk. 
A) credit risk. 
B) interest rate risk. 
C) liquidity risk. 
D) foreign exchange risk. 
E) credit risk, interest rate risk, and foreign exchange risk.

Question 13

Selective hedging occurs by reducing the interest rate risk by selling sufficient futures contracts to offset the interest rate risk exposure of a portion of the cash positions on the balance sheet.

Accepted Answer

A) True 
 B)False

Question 14

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/£. If the current (spot) rate for one-year British pound futures is currently at $1.58/£ and each contract size is £62,500, how many contracts are required to be purchased or sold in order to fully hedge against the pound exposure? (Assume no basis risk).

Accepted Answer

A) Sell 1,600 BP futures. 
B) Buy 1,600 BP futures. 
C) Sell 1,712 BP futures. 
D) Buy 2,560 BP futures. 
E) Buy 1,712 BP futures. 
A) Sell 1,600 BP futures. 
B) Buy 1,600 BP futures. 
C) Sell 1,712 BP futures. 
D) Buy 2,560 BP futures. 
E) Buy 1,712 BP futures.

How is a hedge ratio commonly determined?

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

Selective hedging occurs by reducing the interest rate risk by selling sufficient futures contracts to offset the interest rate risk exposure of a portion of the cash positions on the balance sheet.

More FIs fail due to credit risk exposure than exposure to either interest rate risk or foreign exchange risk.

A futures contract has only one payment cash flow that occurs at the time of delivery.

A spot contract specifies deferred delivery and payment.

Which of the following is an example of microhedging asset-side portfolio risk?

A naive hedge occurs when

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

Financial futures can be used by FIs to manage

Selective hedging occurs by reducing the interest rate risk by selling sufficient futures contracts to offset the interest rate risk exposure of a portion of the cash positions on the balance sheet.

Why Are Financial Institutions Special

Deposit-Taking Institutions

Finance Companies

Securities, Brokerage, and Investment Banking

Mutual Funds, Hedge Funds, and Pension Funds

Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loans

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization Index

Filters

Exam 22: Futures and Forwards

How is a hedge ratio commonly determined?

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

Selective hedging occurs by reducing the interest rate risk by selling sufficient futures contracts to offset the interest rate risk exposure of a portion of the cash positions on the balance sheet.

More FIs fail due to credit risk exposure than exposure to either interest rate risk or foreign exchange risk.

A futures contract has only one payment cash flow that occurs at the time of delivery.

A spot contract specifies deferred delivery and payment.

Which of the following is an example of microhedging asset-side portfolio risk?

A naive hedge occurs when

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

Financial futures can be used by FIs to manage

Selective hedging occurs by reducing the interest rate risk by selling sufficient futures contracts to offset the interest rate risk exposure of a portion of the cash positions on the balance sheet.

Why Are Financial Institutions Special

Deposit-Taking Institutions

Finance Companies

Securities, Brokerage, and Investment Banking

Mutual Funds, Hedge Funds, and Pension Funds

Insurance Companies

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loans

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization Index

Filters