Question 1

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 2

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 the options are correct. 
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 the options are correct.

Question 3

The number of futures contracts that an FI should buy or sell in a macrohedge depends on the

Accepted Answer

A) size of its interest rate risk exposure. 
B) direction of its interest rate risk exposure. 
C) return risk trade-off from fully hedging that risk. 
D) return risk trade-off from selectively hedging that risk. 
E) All of the options. 
A) size of its interest rate risk exposure. 
B) direction of its interest rate risk exposure. 
C) return risk trade-off from fully hedging that risk. 
D) return risk trade-off from selectively hedging that risk. 
E) All of the options.

Question 4

Forward contracts are marked-to-market on a daily basis.

Accepted Answer

A) True 
 B)False

Question 5

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 - dt/360)

Where P = price,FV = face value,d = discount yield,and t = days until maturity. )

Calculate the cash flows on the above futures contract if all interest rates increase by 1.49 percent.(That is$\Delta$R/(1 + R)= 1.49 percent,and 1 bp = $25. )

Accepted Answer

A) The long futures position earns a profit of $3,766.39. 
B) The short futures position earns a profit of $3,725.00. 
C) The long futures position earns a profit of $1.49 million. 
D) The short futures position earns a profit of $1.49 million. 
A) The long futures position earns a profit of $3,766.39. 
B) The short futures position earns a profit of $3,725.00. 
C) The long futures position earns a profit of $1.49 million. 
D) The short futures position earns a profit of $1.49 million.

Question 6

The average duration of the loans is 10 years.The average duration of the deposits is 3 years. $\begin{array}{llr}
\text { Consumer loans } & \$ 50 \text { million Deposits } & \$ 235 \text { million } \
\text { Commercial Loans } & \$ 200 \text { million Equity } & \$ 15 \text { million } \
\text { Total Assets } & \$ 250 \text { million Total Liabilities \& Equity } & \$ 250 \text { million }
\end{array}$
 What is the gain or loss on the futures position using T-Bonds (Duration = 9 years,$96 per $100 face value)if the shock to interest rates is 1 percent? [i.e.$\Delta$R/(1 + R)= 0.01 and $\Delta$Rf/(1 + Rf)= 0.011]

Accepted Answer

A) $16,320,960 loss. 
B) $16,312,320 gain. 
C) $15,552,750 gain. 
D) $15,552,750 loss. 
A) $16,320,960 loss. 
B) $16,312,320 gain. 
C) $15,552,750 gain. 
D) $15,552,750 loss.

Question 7

A naive hedge occurs when

Accepted Answer

A) an FI manager wishes to use futures or other derivative securities to hedge the entire balance sheet duration gap. 
B) a cash asset is hedged on a direct dollar-for-dollar basis with a forward or futures contract. 
C) an FI reduces its interest rate or other risk exposure to the lowest possible level by selling sufficient futures to offset the interest rate risk exposure of its whole balance sheet. 
D) an FI purchases an insurance cover to the extent of 80% of losses arising from adverse movement in asset prices. 
A) an FI manager wishes to use futures or other derivative securities to hedge the entire balance sheet duration gap. 
B) a cash asset is hedged on a direct dollar-for-dollar basis with a forward or futures contract. 
C) an FI reduces its interest rate or other risk exposure to the lowest possible level by selling sufficient futures to offset the interest rate risk exposure of its whole balance sheet. 
D) an FI purchases an insurance cover to the extent of 80% of losses arising from adverse movement in asset prices.

Question 8

An off-balance-sheet forward position is used to hedge the FI's on-balance-sheet risk exposure.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

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

Question 10

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.

What is the end-of-year profit or loss on the bank's cash position if in one year the exchange rate falls to U.S.$0.765/C $1? Assume there is no change in interest rates.(Choose the closest answer)

Accepted Answer

A) Loss of U.S.$75,000. 
B) Profit of C $274,000. 
C) Loss of U.S.$7,000. 
D) Profit of C $9,000. 
A) Loss of U.S.$75,000. 
B) Profit of C $274,000. 
C) Loss of U.S.$7,000. 
D) Profit of C $9,000.

Question 11

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

Accepted Answer

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

Question 12

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 13

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.

What is the end-of-year profit or loss on the bank's cash position if in one year both Canadian bond rates increase to 7.5 percent and the exchange rate falls to U.S.$0.765 per Canadian dollar? (Assume no change in U.S.interest rates. )(Choose the closest answer)

Accepted Answer

A) Loss of U.S.$12,000. 
B) Loss of U.S.$75,000. 
C) Profit of C $9,000. 
D) Profit of U.S.$50,000. 
A) Loss of U.S.$12,000. 
B) Loss of U.S.$75,000. 
C) Profit of C $9,000. 
D) Profit of U.S.$50,000.

Question 14

XYZ Bank lends $20,000,000 to ABC Corporation which has a credit rating of BB.The spread of a BB rated benchmark bond is 2.5 percent over the U.S.Treasury bond of similar maturity.XYZ Bank sells a $20,000,000 one-year credit forward contract to IWILL Insurance Company.At maturity,the spread of the benchmark bond against the Treasury bond is 2.1 percent,and the benchmark bond has a modified duration of 4 years.What is the amount of payment paid by whom to whom at the maturity of the credit forward contract?

Accepted Answer

A) The seller pays the buyer $320,000. 
B) The buyer pays the seller $320,000. 
C) The seller pays the buyer $80,000. 
D) The buyer pays the seller $80,000. 
A) The seller pays the buyer $320,000. 
B) The buyer pays the seller $320,000. 
C) The seller pays the buyer $80,000. 
D) The buyer pays the seller $80,000.

Question 15

Hedging effectiveness often is measured by the squared correlation between past changes in the spot asset prices and futures prices.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

Basis risk occurs when the underlying security in the futures contract is not the same asset as the cash asset on the balance sheet.

Accepted Answer

A) True 
 B)False

Question 18

Who are the common buyers of credit forwards?

Accepted Answer

A) Insurance companies. 
B) Banks. 
C) Federal Reserve. 
D) Stock brokers. 
A) Insurance companies. 
B) Banks. 
C) Federal Reserve. 
D) Stock brokers.

Question 19

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 20

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

Accepted Answer

A) spot contract. 
B) forward contract. 
C) futures contract. 
D) put options contract. 
A) spot contract. 
B) forward contract. 
C) futures contract. 
D) put options contract.

Exam 22: Futures and Forwards

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

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

The number of futures contracts that an FI should buy or sell in a macrohedge depends on the

Forward contracts are marked-to-market on a daily basis.

A naive hedge occurs when

An off-balance-sheet forward position is used to hedge the FI's on-balance-sheet risk exposure.

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

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

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

Hedging effectiveness often is measured by the squared correlation between past changes in the spot asset prices and futures prices.

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

Basis risk occurs when the underlying security in the futures contract is not the same asset as the cash asset on the balance sheet.

Who are the common buyers of credit forwards?

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

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

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