Exam 22: Futures and Forwards

The average duration of the loans is 10 years.The average duration of the deposits is 3 years. Consumer loans \ 50 million Deposits \ 235 million Commercial Loans \ 200 million Equity \ 15 million Total Assets \ 250 million Total Liabilities \& Equity \ 250 million Assume that the hedge was placed as indicated in a prior question,and that the BP futures contract is trading at $1.62/ $\le$ .Assume the futures contract has some days remaining to maturity.What will be the gain or loss on the hedge if it is unwound at this price?

A spot contract specifies deferred delivery and payment.

Conyers Bank holds U.S.Treasury bonds with a book value of $30 million.However,the U.S.Treasury bonds currently are worth $28,387,500. The portfolio manager for Conyers Bank wishes to sell the entire issue of Treasury bonds at a current price of 87-05/32^nds.What will be the gain or loss on the cash position since the futures contract was placed? (That is,since the bonds were valued at $28,387,500. )

A futures contract

Which of the following indicates the need to place a hedge?

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

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

A forward contract specifies immediate delivery for immediate payment.

91-day Treasury bill rates = 9.71 percent 91-day Treasury bill futures rates = 9.66 percent (Reminder: Treasury bill prices are calculated using the following formula: P = FV * (1 - d_t/360) Where P = price,FV = face value,d = discount yield,and t = days until maturity. ) What is the basis on the T-bill futures contract?

Microhedging uses futures or forward contracts to hedge the entire balance sheet duration gap.

All bonds that are deliverable under a Treasury bond futures contract have a maturity of 20 years and an interest rate of 8 percent.

As a result of the negative role that over-the-counter derivative securities played during the financial crisis,

Routine hedging

As a result of the Volcker Rule (2014)there was an increase in the use of derivative securities by U.S.depository institutions.

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.

Routine hedging will allow the FI to achieve greater return from the assets and liabilities on the balance sheet.

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

If a 12-year,6.5 percent semi-annual $100,000 T-bond,currently yielding 4.10 percent,is used to deliver against a 6-year,5 percent T-bond at 110-17/32,what is the conversion factor? What would the buyer have to pay the seller?

The average duration of the loans is 10 years.The average duration of the deposits is 3 years. Consumer loans \ 50 million Deposits \ 235 million Commercial Loans \ 200 million Equity \ 15 million Total Assets \ 250 million Total Liabilities \& Equity \ 250 million What is the net gain or loss on the loan given that the exchange rates at the time of repayment were $1.63/ $\le$ in the cash market and 1.62/ $\le$ in the futures market? Assume that the futures position is opened and unwound as stated in previous question.

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