Exam 22: Futures and Forwards

Selective hedging occurs by reducing the interest rate risk by selling sufficient futures contracts to offset the interest rate risk exposure of a portion of the cash positions on the balance sheet.

What is the purpose of a credit forward agreement?

The covariance of the change in spot exchange rates and the change in futures exchange rates is 0.6060,and the variance of the change in futures exchange rates is 0.5050.What is the estimated hedge ratio for this currency?

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 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. , $\Delta$ R/(1 + R)= 0.01,the implied rate on the deliverable bonds in the futures market increases by 1.1 percent,i.e. , $\Delta$ R_f/(1 + R_f)= 0.011?

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 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?

Financial futures can be used by FIs to manage

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. How can the portfolio manager use futures markets to protect against the risk exposure of rising interest rates?

The terms of futures contracts traded in the U.S.are set by the exchange on which they propose to be traded,but are subject to approval by the

Selective hedging that results in an over-hedged position may be regarded as speculative by regulators.

Hedging foreign exchange risk in the futures market may involve uncertainty about all of the transactions necessary to achieve the hedge to fulfillment.