Exam 22: Futures and Forwards

The covariance of the change in spot exchange rates and the change in futures exchange rates is 0.6606, and the variance of the change in futures exchange rates is 0.6060. The variance of the change in spot exchange rates is 0.9090. What is the degree of hedging effectiveness?

Catastrophe futures are designed to hedge extreme losses of natural disasters for property & casualty insurance companies.

Hedging a specific on-balance-sheet cash position usually will only require more T-bill futures contracts than hedging the same cash position with T-bond futures contracts because the T-bond contract size is only 10 percent as large as large as the T-bill contract.

An adjustment for basis risk with a value of "br" less than one means that the percent change in the spot rates is greater than the change in rate in the deliverable bond in the futures market.

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 uniform guidelines issued by bank regulators for trading in futures and forwards

Catastrophe futures are designed to hedge extreme losses of natural disasters for property & casualty insurance companies.

A futures contract

In a credit forward agreement hedge, the loss on the balance sheet cash position is offset completely by the gain on the off-balance-sheet credit forward agreement if the characteristics of the benchmark bond and the bank's loan to the borrower are the same.

A credit forward agreement specifies a credit spread on a benchmark U.S. Treasury bond.

Tailing-the-hedge normally requires an FI manager to utilize more futures contracts to hedge a cash position than are warranted by the initial analysis.

The average duration of the loans is 10 years. The average duration of the deposits is 3 years. What is the number of T-Bill futures contracts necessary to hedge the balance sheet if the duration of the deliverable T-bills is 0.25 years and the current price of the futures contract is $98 per $100 face value?

An off-balance-sheet forward position is used to hedge the FI's on-balance-sheet risk exposure.

Macrohedging uses a derivative contract, such as a futures or forward contract, to hedge a particular asset or liability risk.

An agreement between a buyer and a seller at time 0 to exchange a standardized, pre-specified asset for cash at a specified later date is characteristic of a

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 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?

Selective hedging that results in an over-hedged position may be regarded as speculative by regulators.

In a credit forward contract transaction

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 net gain or loss on the loan given that the exchange rates at the time of repayment were $1.63/£ in the cash market and 1.62/£ in the futures market? Assume that the futures position is opened and unwound as stated in previous questions.