Question 1

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.

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 Treasury bond futures prices are currently 89-00/32nds, what is the value of the Treasury bond futures hedge position?

Accepted Answer

A) $30,000,000. 
B) $28,387,500. 
C) $26,700,000. 
D) $89,000,000. 
E) $890,000. 
A) $30,000,000. 
B) $28,387,500. 
C) $26,700,000. 
D) $89,000,000. 
E) $890,000.

Question 3

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

Accepted Answer

A) require a bank to establish trading limits. 
B) require a bank to disclose large contract positions. 
C) require a bank to establish internal guidelines regarding hedging activities. 
D) All of these. 
E) require a bank to establish trading limits, and require a bank to establish internal guidelines regarding hedging activities. 
A) require a bank to establish trading limits. 
B) require a bank to disclose large contract positions. 
C) require a bank to establish internal guidelines regarding hedging activities. 
D) All of these. 
E) require a bank to establish trading limits, and require a bank to establish internal guidelines regarding hedging activities.

Question 4

What does R2 = 0 indicate?

Accepted Answer

A) Changes in the spot rate and changes in the futures price are perfectly correlated. 
B) All observations between changes in spot rate and changes in futures price lie on a straight line. 
C) The spot and future exchange rates are expected to move imperfectly together. 
D) The FI must sell a greater number of futures to hedge the cash position. 
E) There is no statistical association between changes in spot rates and changes in futures price. 
A) Changes in the spot rate and changes in the futures price are perfectly correlated. 
B) All observations between changes in spot rate and changes in futures price lie on a straight line. 
C) The spot and future exchange rates are expected to move imperfectly together. 
D) The FI must sell a greater number of futures to hedge the cash position. 
E) There is no statistical association between changes in spot rates and changes in futures price.

Question 5

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

Accepted Answer

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

Question 6

Federal regulations in Canada allow derivatives to be used only by the 25 largest banks.

Accepted Answer

A) True 
 B)False

Question 7

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 8

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

Accepted Answer

A) The settlement price of a forward contract is fixed over the life of the contract but in a futures contract is marked to market daily. 
B) Forward contracts are normally arranged through an organized exchange, while most futures contracts are OTC contracts. 
C) Both are essentially the same, except for trading volumes which are higher for futures contracts. 
D) Both are essentially the same, except for the fact that the terms of a forward contract is set by an exchange, subject to the approval of the Commodity Futures Trading Commission (CFT
C) . 
E) Delivery of the underlying asset almost always occurs on a futures contract but almost never occurs on a forward contract. 
A) The settlement price of a forward contract is fixed over the life of the contract but in a futures contract is marked to market daily. 
B) Forward contracts are normally arranged through an organized exchange, while most futures contracts are OTC contracts. 
C) Both are essentially the same, except for trading volumes which are higher for futures contracts. 
D) Both are essentially the same, except for the fact that the terms of a forward contract is set by an exchange, subject to the approval of the Commodity Futures Trading Commission (CFT
C) . 
E) Delivery of the underlying asset almost always occurs on a futures contract but almost never occurs on a forward contract.

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

Federal regulations in Canada allow derivatives to be used only by the 25 largest banks.

Accepted Answer

A) True 
 B)False

Question 11

Historical analysis of recent changes in exchange rates in both the spot and futures markets for a given currency reveals that spot rates are thirty percent more sensitive than futures prices. Given this information, the hedge ratio for this currency is

Accepted Answer

A) 0.70. 
B) 0.77. 
C) 1.30. 
D) 1.43. 
E) 1.86. 
A) 0.70. 
B) 0.77. 
C) 1.30. 
D) 1.43. 
E) 1.86.

Question 12

The average duration of the loans is 10 years. The average duration of the deposits is 3 years.   What is the change in the value of the FI's equity for a 1 percent increase in interest rates from the current rates of 10 percent ?

Accepted Answer

A) -$,979,091. 
B) -$16,318,182. 
C) -$15,979,091. 
D) +$16,318,182. 
E) +$979,091. 
A) -$,979,091. 
B) -$16,318,182. 
C) -$15,979,091. 
D) +$16,318,182. 
E) +$979,091.

Question 13

The payoff on a catastrophe futures contract is adjusted for the actual loss ratio of the insurer.

Accepted Answer

A) True 
 B)False

Question 14

The sensitivity of the price of a futures contract depends on the duration of the deliverable asset underlying the contract.

Accepted Answer

A) True 
 B)False

Question 15

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., ΔRf/(1 + Rf) = 0.011?

Accepted Answer

A) 1,500 contracts. 
B) 1,888 contracts. 
C) 2,100 contracts. 
D) 2,408 contracts. 
E) 3,100 contracts. 
A) 1,500 contracts. 
B) 1,888 contracts. 
C) 2,100 contracts. 
D) 2,408 contracts. 
E) 3,100 contracts.

Question 16

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 17

Which of the following is NOT true regarding hedge ratio?

Accepted Answer

A) When there is no basis risk hedge ratio is equal to one. 
B) When h = 1, both spot and futures are expected to change together by the same absolute amount. 
C) When h = 1, FX risk of the cash position should be hedged dollar for dollar by buying FX futures. 
D) When basis risk is present, the spot and future exchange rates are expected to move imperfectly together. 
E) The FI must sell a greater number of futures when there is basis risk than it has to when basis risk is absent. 
A) When there is no basis risk hedge ratio is equal to one. 
B) When h = 1, both spot and futures are expected to change together by the same absolute amount. 
C) When h = 1, FX risk of the cash position should be hedged dollar for dollar by buying FX futures. 
D) When basis risk is present, the spot and future exchange rates are expected to move imperfectly together. 
E) The FI must sell a greater number of futures when there is basis risk than it has to when basis risk is absent.

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

Futures contracts are the primary security that insurance companies and banks use to hedge interest rate risk prior to originating mortgages.

Accepted Answer

A) True 
 B)False

Exam 22: Futures and Forwards

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.

Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. If Treasury bond futures prices are currently 89-00/32nds, what is the value of the Treasury bond futures hedge position?

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

What does R2 = 0 indicate?

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

Federal regulations in Canada allow derivatives to be used only by the 25 largest banks.

Financial futures can be used by FIs to manage

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

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

Federal regulations in Canada allow derivatives to be used only by the 25 largest banks.

Historical analysis of recent changes in exchange rates in both the spot and futures markets for a given currency reveals that spot rates are thirty percent more sensitive than futures prices. Given this information, the hedge ratio for this currency is

The average duration of the loans is 10 years. The average duration of the deposits is 3 years. What is the change in the value of the FI's equity for a 1 percent increase in interest rates from the current rates of 10 percent ?

The payoff on a catastrophe futures contract is adjusted for the actual loss ratio of the insurer.

The sensitivity of the price of a futures contract depends on the duration of the deliverable asset underlying the contract.

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

Which of the following is NOT true regarding hedge ratio?

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

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

Futures contracts are the primary security that insurance companies and banks use to hedge interest rate risk prior to originating mortgages.

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

Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. If Treasury bond futures prices are currently 89-00/32^nds, what is the value of the Treasury bond futures hedge position?

What does R² = 0 indicate?