Question 1

Which of the following is true of the market price of a futures contract over time?

Accepted Answer

A)  It is set at time 0. 
B)  It is fixed over the life of the contract. 
C)  It changes based on the market value of the underlying asset. 
D)  It decreases with time to expiration. 
A)  It is set at time 0. 
B)  It is fixed over the life of the contract. 
C)  It changes based on the market value of the underlying asset. 
D)  It decreases with time to expiration.

Question 2

Which of the following statements is true?

Accepted Answer

A)  Routine hedging seeks to hedge all interest rate risk exposure. 
B)  Routine hedging seeks to hedge all foreign exchange rate risk exposure. 
C)  Routine hedging seeks to hedge all liquidity risk exposure. 
D)  Routine hedging seeks to hedge all capital risk exposure. 
A)  Routine hedging seeks to hedge all interest rate risk exposure. 
B)  Routine hedging seeks to hedge all foreign exchange rate risk exposure. 
C)  Routine hedging seeks to hedge all liquidity risk exposure. 
D)  Routine hedging seeks to hedge all capital risk exposure.

Question 3

Which of the following statements is true?

Accepted Answer

A)  In Australian interest rate futures there is no physical settlement of either 10 year or 3 year bond futures. 
B)  In Australian interest rate futures there is no physical settlement of either 10 year or 5 year bond futures. 
C)  In Australian interest rate futures there is no physical settlement of either 5 year or 3 year bond futures. 
D)  In Australian interest rate futures there is always physical settlement. 
A)  In Australian interest rate futures there is no physical settlement of either 10 year or 3 year bond futures. 
B)  In Australian interest rate futures there is no physical settlement of either 10 year or 5 year bond futures. 
C)  In Australian interest rate futures there is no physical settlement of either 5 year or 3 year bond futures. 
D)  In Australian interest rate futures there is always physical settlement.

Question 4

Which of the following statements is true?

Accepted Answer

A)  Using a futures or forward contract to hedge a specific asset or liability risk is called macro-hedging. 
B)  Using a futures or forward contract to hedge a specific asset or liability risk is called micro-hedging. 
C)  Using a futures or forward contract to hedge a specific asset or liability risk is called asset- or liability-specific hedging. 
D)  Using a futures or forward contract to hedge a specific asset or liability risk is called naïve hedging. 
A)  Using a futures or forward contract to hedge a specific asset or liability risk is called macro-hedging. 
B)  Using a futures or forward contract to hedge a specific asset or liability risk is called micro-hedging. 
C)  Using a futures or forward contract to hedge a specific asset or liability risk is called asset- or liability-specific hedging. 
D)  Using a futures or forward contract to hedge a specific asset or liability risk is called naïve hedging.

Question 5

When calculating the number of hedges required for a position, the number should always be rounded up to cover the full position.

Accepted Answer

A) True 
 B)False

Question 6

Assume that the price paid by the buyer of a forward is $82 000 and further assume that the spot price of purchasing the hedged underlying asset at delivery date is $85 000. What is the result for the forward seller?

Accepted Answer

A)  A $3000 profit. 
B)  A $3000 loss. 
C)  The answer depends on how the forward price develops over time. 
D)  Too little information to answer the question. 
A)  A $3000 profit. 
B)  A $3000 loss. 
C)  The answer depends on how the forward price develops over time. 
D)  Too little information to answer the question.

Question 7

Which of the following is a major difference between forwards and futures?

Accepted Answer

A)  Forwards are marked-to-market, while futures are not. 
B)  Futures are tailor made, while forwards are standardised. 
C)  The default risk of futures is significantly reduced by the futures exchange guaranteeing to indemnify counterparties against credit risk, while this is not the case for forwards. 
D)  Forwards are marked-to-market, while futures are not, futures are tailor made, while forwards are standardised and the default risk of futures is significantly reduced by the futures exchange guaranteeing to indemnify counterparties against credit risk, while this is not the case for forwards. 
A)  Forwards are marked-to-market, while futures are not. 
B)  Futures are tailor made, while forwards are standardised. 
C)  The default risk of futures is significantly reduced by the futures exchange guaranteeing to indemnify counterparties against credit risk, while this is not the case for forwards. 
D)  Forwards are marked-to-market, while futures are not, futures are tailor made, while forwards are standardised and the default risk of futures is significantly reduced by the futures exchange guaranteeing to indemnify counterparties against credit risk, while this is not the case for forwards.

Question 8

The buyer of a bond call option:

Accepted Answer

A)  receives a premium in return for standing ready to sell the bond at the exercise price. 
B)  receives a premium in return for standing ready to buy bonds at the exercise price. 
C)  pays a premium and has the right to sell the underlying bond at the agreed exercise price. 
D)  pays a premium and has the right to buy the underlying bond at the agreed exercise price. 
A)  receives a premium in return for standing ready to sell the bond at the exercise price. 
B)  receives a premium in return for standing ready to buy bonds at the exercise price. 
C)  pays a premium and has the right to sell the underlying bond at the agreed exercise price. 
D)  pays a premium and has the right to buy the underlying bond at the agreed exercise price.

Question 9

It is possible to create a synthetic fixed-rate position from floating rate instruments using futures contracts. Forward contracts cannot be used.

Accepted Answer

A) True 
 B)False

Question 10

Off-market swaps are swaps that are have non-standard terms that require one party to compensate another so the swap can be tailored to the needs of the transacting parties, compensation is usually in the form of an upfront fee or payment.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements is true?

Accepted Answer

A)  If a cash asset is hedged on a dollar for dollar basis with a forward or futures contract, we refer to this hedge as a dollar hedge. 
B)  If a cash asset is hedged on a dollar for dollar basis with a forward or futures contract, we refer to this hedge as a plain hedge. 
C)  If a cash asset is hedged on a dollar for dollar basis with a forward or futures contract, we refer to this hedge as a naive hedge. 
D)  All of the listed options are correct. 
A)  If a cash asset is hedged on a dollar for dollar basis with a forward or futures contract, we refer to this hedge as a dollar hedge. 
B)  If a cash asset is hedged on a dollar for dollar basis with a forward or futures contract, we refer to this hedge as a plain hedge. 
C)  If a cash asset is hedged on a dollar for dollar basis with a forward or futures contract, we refer to this hedge as a naive hedge. 
D)  All of the listed options are correct.

Question 12

Which of the following statements is true?

Accepted Answer

A)  In a spot contract the buyer and seller enter into a contract at time 0, the contract is marked-to-market, the seller agrees on a price at time 0 and the bonds is delivered by the seller to the buyer 'at that time'. 
B)  In a spot contract the buyer and seller agree on a price at time 0 and the bonds is delivered by the seller at a future point in time, e.g. after three months. 
C)  In a spot contract the buyer and on a daily basis, and the buyer pays the spot price quoted at expiry. 
D)  None of the listed options are correct. 
A)  In a spot contract the buyer and seller enter into a contract at time 0, the contract is marked-to-market, the seller agrees on a price at time 0 and the bonds is delivered by the seller to the buyer 'at that time'. 
B)  In a spot contract the buyer and seller agree on a price at time 0 and the bonds is delivered by the seller at a future point in time, e.g. after three months. 
C)  In a spot contract the buyer and on a daily basis, and the buyer pays the spot price quoted at expiry. 
D)  None of the listed options are correct.

Question 13

Partially hedging the gap or individual assets and liabilities is referred to as?

Accepted Answer

A)  hedging arbitrarily 
B)  hedging selectively 
C)  hedging partially 
D)  hedging naively 
A)  hedging arbitrarily 
B)  hedging selectively 
C)  hedging partially 
D)  hedging naively

Question 14

Which of the following statements is true?

Accepted Answer

A)  Over-hedging will lead to a significant reduction in risk, but also in returns. 
B)  In terms of risk and return, there is a linear relationship between an unhedged, a selectively hedged, a fully hedged and an over-hedged position. 
C)  It is not possible to over-hedge a position. 
D)  Over-hedging will lead to a significant reduction in risk, but also in returns, in terms of risk and return, there is a linear relationship between an unhedged, a selectively hedged, a fully hedged and an over-hedged position and it is not possible to over-hedge a position. 
A)  Over-hedging will lead to a significant reduction in risk, but also in returns. 
B)  In terms of risk and return, there is a linear relationship between an unhedged, a selectively hedged, a fully hedged and an over-hedged position. 
C)  It is not possible to over-hedge a position. 
D)  Over-hedging will lead to a significant reduction in risk, but also in returns, in terms of risk and return, there is a linear relationship between an unhedged, a selectively hedged, a fully hedged and an over-hedged position and it is not possible to over-hedge a position.

Question 15

In June, an investor finds out that in September she will receive $10 million to invest in three month maturity securities. In June, the 91-day Treasury bill rate is 5.50 per cent. If the investor uses 10 T-bill futures contracts to hedge the interest rate risk, should she take a long or a short hedge? What are the returns on the futures hedge if there is no basis risk?

Accepted Answer

A)  She earns $30 000 on the short futures hedge. 
B)  She earns $30 000 on the long futures hedge. 
C)  She earns $7500 on the short futures hedge. 
D)  She earns $7500 on the long futures hedge. 
A)  She earns $30 000 on the short futures hedge. 
B)  She earns $30 000 on the long futures hedge. 
C)  She earns $7500 on the short futures hedge. 
D)  She earns $7500 on the long futures hedge.

Question 16

What kind of interest rate swap (of liabilities) would an FI with a positive funding gap utilise to hedge interest rate risk exposure?

Accepted Answer

A)  Swap in floating-rate payments for fixed-rate payments. 
B)  Swap in floating-rate receipts for fixed-rate payments. 
C)  Swap in fixed-rate receipts for floating-rate receipts. 
D)  Swap in floating-rate receipts for fixed-rate receipts. 
A)  Swap in floating-rate payments for fixed-rate payments. 
B)  Swap in floating-rate receipts for fixed-rate payments. 
C)  Swap in fixed-rate receipts for floating-rate receipts. 
D)  Swap in floating-rate receipts for fixed-rate receipts.

Question 17

A company is considering using futures contracts to hedge an identified interest rate exposure on its debt facilities. However, it is concerned about the impact of basis risk. All of the following statements regarding basis risk are correct, except:

Accepted Answer

A)  basis risk is the difference between prices in the physical market and the price of the relevant futures market contract. 
B)  the existence of basis risk removes the opportunity for a perfect borrowing hedge. 
C)  initial basis will be evident while the market is of the view that physical market prices will remain stable. 
D)  final basis will exist where a futures contract is used to hedge a risk associated with a different physical market product. 
A)  basis risk is the difference between prices in the physical market and the price of the relevant futures market contract. 
B)  the existence of basis risk removes the opportunity for a perfect borrowing hedge. 
C)  initial basis will be evident while the market is of the view that physical market prices will remain stable. 
D)  final basis will exist where a futures contract is used to hedge a risk associated with a different physical market product.

Question 18

What is a swap?

Accepted Answer

A)  An agreement between two parties to exchange assets or a series of cash flows for a specific period of time at a specified interval. 
B)  An agreement between a buyer and a seller at time 0 to exchange a non-standardised asset for cash at some future date. 
C)  A contract that gives the holder the right, but not the obligation to buy or sell the underlying asset at a specified price within a specified period of time. 
D)  Trading in securities prior to their actual issue. 
A)  An agreement between two parties to exchange assets or a series of cash flows for a specific period of time at a specified interval. 
B)  An agreement between a buyer and a seller at time 0 to exchange a non-standardised asset for cash at some future date. 
C)  A contract that gives the holder the right, but not the obligation to buy or sell the underlying asset at a specified price within a specified period of time. 
D)  Trading in securities prior to their actual issue.

Question 19

In June, an investor finds out that in September she will receive $10 million to invest in three month maturity securities. In June, the 91-day Treasury bill rate is 5.50 per cent. What is the investor's profit (loss) if the 91-day rate falls to 5.20 per cent in September?

Accepted Answer

A)  The investor loses $30 000 because of the 30 basis point decline in interest rates. 
B)  The investor gains $30 000 because of the 30 basis point decline in interest rates. 
C)  The investor gains $7583 because of the 30 basis point decline in interest rates. 
D)  The investor loses $7583 because of the 30 basis point decline in interest rates. 
A)  The investor loses $30 000 because of the 30 basis point decline in interest rates. 
B)  The investor gains $30 000 because of the 30 basis point decline in interest rates. 
C)  The investor gains $7583 because of the 30 basis point decline in interest rates. 
D)  The investor loses $7583 because of the 30 basis point decline in interest rates.

Question 20

Buying a call option (standing ready to buy bonds at the exercise price) is a strategy that a FI may take when bond prices rise and interest rates are expected to fall.

Accepted Answer

A) True 
 B)False

Which of the following is true of the market price of a futures contract over time?

Which of the following statements is true?

Which of the following statements is true?

Which of the following statements is true?

When calculating the number of hedges required for a position, the number should always be rounded up to cover the full position.

Assume that the price paid by the buyer of a forward is $82 000 and further assume that the spot price of purchasing the hedged underlying asset at delivery date is $85 000. What is the result for the forward seller?

Which of the following is a major difference between forwards and futures?

The buyer of a bond call option:

It is possible to create a synthetic fixed-rate position from floating rate instruments using futures contracts. Forward contracts cannot be used.

Off-market swaps are swaps that are have non-standard terms that require one party to compensate another so the swap can be tailored to the needs of the transacting parties, compensation is usually in the form of an upfront fee or payment.

Which of the following statements is true?

Which of the following statements is true?

Partially hedging the gap or individual assets and liabilities is referred to as?

Which of the following statements is true?

What kind of interest rate swap (of liabilities) would an FI with a positive funding gap utilise to hedge interest rate risk exposure?

A company is considering using futures contracts to hedge an identified interest rate exposure on its debt facilities. However, it is concerned about the impact of basis risk. All of the following statements regarding basis risk are correct, except:

What is a swap?

In June, an investor finds out that in September she will receive $10 million to invest in three month maturity securities. In June, the 91-day Treasury bill rate is 5.50 per cent. What is the investor's profit (loss) if the 91-day rate falls to 5.20 per cent in September?

Buying a call option (standing ready to buy bonds at the exercise price) is a strategy that a FI may take when bond prices rise and interest rates are expected to fall.

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Credit Risk I: Individual Loan Risk

Market Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risk

Capital Management and Adequacy

Filters

Exam 7: Managing Interest Rate Risk Using Off Balance Sheet Instruments

Which of the following is true of the market price of a futures contract over time?

Which of the following statements is true?

Which of the following statements is true?

Which of the following statements is true?

When calculating the number of hedges required for a position, the number should always be rounded up to cover the full position.

Assume that the price paid by the buyer of a forward is $82 000 and further assume that the spot price of purchasing the hedged underlying asset at delivery date is $85 000. What is the result for the forward seller?

Which of the following is a major difference between forwards and futures?

The buyer of a bond call option:

It is possible to create a synthetic fixed-rate position from floating rate instruments using futures contracts. Forward contracts cannot be used.

Off-market swaps are swaps that are have non-standard terms that require one party to compensate another so the swap can be tailored to the needs of the transacting parties, compensation is usually in the form of an upfront fee or payment.

Which of the following statements is true?

Which of the following statements is true?

Partially hedging the gap or individual assets and liabilities is referred to as?

Which of the following statements is true?

What kind of interest rate swap (of liabilities) would an FI with a positive funding gap utilise to hedge interest rate risk exposure?

A company is considering using futures contracts to hedge an identified interest rate exposure on its debt facilities. However, it is concerned about the impact of basis risk. All of the following statements regarding basis risk are correct, except:

What is a swap?

In June, an investor finds out that in September she will receive $10 million to invest in three month maturity securities. In June, the 91-day Treasury bill rate is 5.50 per cent. What is the investor's profit (loss) if the 91-day rate falls to 5.20 per cent in September?

Buying a call option (standing ready to buy bonds at the exercise price) is a strategy that a FI may take when bond prices rise and interest rates are expected to fall.

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Credit Risk I: Individual Loan Risk

Market Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risk

Capital Management and Adequacy

Filters