Exam 22: Futures and Forwards

Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. Assume that the portfolio manager sells the bonds at a price of87-05/32, and that she closes out the futures hedge position at a price of81-17/32. What will be the net gain or loss on the entire bond transaction from the time that the hedge was placed?

In a credit forward contract transaction

The average duration of the loans is 10 years. The average duration of the deposits is 3 years. What is the gain or loss on the futures position using T-Bonds (Duration = 9 years, $96 per $100 face value) if the shock to interest rates is 1 percent [i.e. ΔR/(1 + R) = 0.01 and ΔR_f/(1 + R_f) = 0.011]?

Hedging foreign exchange risk in the futures market may involve uncertainty about all of the transactions necessary to achieve the hedge to fulfillment.

Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. How can the portfolio manager use futures markets to protect against the risk exposure of rising interest rates?

What is the reason for decrease in the number of futures contract needed to hedge a cash position in case of tailing the hedge?

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

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

What is a difference between a forward contract and a future contract?

A conversion factor often is used to determine the invoice price on a futures contract when a bond other than the benchmark bond is delivered to the buyer.

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 should be the trading price of the BP futures contract at the end of the year in order for the FI to be perfectly hedged? That is, the FI earns its original anticipated spread without any effects of exchange rate changes?

An FI with a positive duration gap is exposed to interest rate declines and could hedge its interest rate risk by buying forward contracts.

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.

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

Commercial banks, investment banks, and broker-dealers are the major forward market participants.

The hedge ratio measures the impact that tailing-the-hedge will have on the number of contracts necessary to hedge the cash position.

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

The average duration of the loans is 10 years. The average duration of the deposits is 3 years. What is the number of T-bond futures contracts necessary to hedge the balance sheet if the duration of the deliverable bonds is 9 years and the current price of the futures contract is $96 per $100 face value and if basis risk shows that for every 1 percent shock to interest rates, i.e., ΔR/(1 + R) = 0.01, the implied rate on the deliverable bonds in the futures market increases by 1.1 percent, i.e., ΔR_f/(1 + R_f) = 0.011?

The average duration of the loans is 10 years. The average duration of the deposits is 3 years. What is the number of T-bond futures contracts necessary to hedge the balance sheet if the duration of the deliverable bonds is 9 years and the current price of the futures contract is $96 per $100 face value?

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 at the end of the year, the exchange rate is $1.65/£, what is the spread earned on the loan by the FI in dollars after adjusting fully for exchange rates?