Exam 22: Futures and Forwards

A U.S.bank issues a 1-year,$1 million U.S.CD at 5 percent annual interest to finance a C $1.274 million investment in 2-year fixed-rate Canadian bonds selling at par and paying 7 percent annually.You expect to liquidate your position in 1 year upon maturity of the CD.Spot exchange rates are U.S.$0.78493 per Canadian dollar. Your position is exposed to

As of 2015,commercial banks held more forward contracts than futures contracts for trading.

An agreement between a buyer and a seller at time 0 to exchange a pre-specified asset for cash at a specified later date is the 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. Pension funds

Which of the following is an example of microhedging asset-side portfolio risk?

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?

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. Assume that the portfolio manager sells the bonds at a price of 87-05/32,and that she closes out the futures hedge position at a price of 81-17/32.What will be the net gain or loss on the entire bond transaction from the time that the hedge was placed?

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.

If a 16-year 12 percent semi-annual $100,000 T-bond,currently yielding 10 percent,is used to deliver against a 20-year,8 percent T-bond at 114-16/32,what is the conversion factor? What would the buyer have to pay the seller?

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.

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

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. If the portfolio manager put on the hedge when T-bond futures were quoted at 89-00/32^nds,what is the profit/loss on the futures position if the settlement price is 81-27/32^nds?

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 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.

A U.S.bank issues a 1-year,$1 million U.S.CD at 5 percent annual interest to finance a C $1.274 million investment in 2-year fixed-rate Canadian bonds selling at par and paying 7 percent annually.You expect to liquidate your position in 1 year upon maturity of the CD.Spot exchange rates are U.S.$0.78493 per Canadian dollar. If in one year there is no change in either interest rates or exchange rates,what is the end-of-year profit or loss of your bank's cash position? Assume that annual interest is paid on both the CD and the Canadian bonds on the date of liquidation in exactly one year.

A forward contract

It is not possible to separate credit risk exposure from the lending process itself.

Which of the following identifies the largest group of derivative contracts as of 2015?

As of 2015,U.S.commercial banks held over $42 trillion of forward contracts that were listed for trading on the Chicago Mercantile exchange.

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

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