Exam 22: Futures and Forwards

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?

As of June 2012, U.S. commercial banks held over $42 trillion of forward contracts that were listed for trading on the Chicago Mercantile exchange.

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

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

An investor sold a $100,000 Treasury bond futures contract at 99-02/32^nds yesterday. Today the Treasury bond futures settlement price is 99-31/32^nds. What is the one-day profit or loss on the Treasury bond futures position?

In a forward contract agreement, the quantity of product to be traded, the time of the actual trade and the price are determined at the time of the agreement.

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

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 change in the value of the FI's equity for a 1 percent increase in interest rates from the current rates of 10 percent ?

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

The uniform guidelines issued by bank regulators for trading in 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 -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. ?R/(1 + R) = 0.01 and ?R_f/(1 + R_f) = 0.011]?

Macrohedging uses a derivative contract, such as a futures or forward contract, to hedge a particular asset or liability risk.

What does R² = 0 indicate?

An investor buys a $100,000 Treasury bond futures contract at 99-13/32^nds. The following day the Treasury bond futures settlement price is 99-26/32^nds. What is the one-day profit or loss on the Treasury bond futures position?

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

The use of futures contracts by banks is subject to risk-based capital guidelines through the off-balance-sheet risk calculations for risk-based capital.

Selling a credit forward agreement generates a payoff similar to

Which of the following group of derivative securities had the smallest notational value among the top 25 FIs as of June 2012?

When will the estimated hedge ratio be greater than one?

An FI has a 1-year 8-percent US $160 million loan financed with a 1-year 7-percent UK ≤100 million CD. The current exchange rate is $1.60/≤. -If the current (spot) rate for one-year British pound futures is currently at $1.58/≤ and each contract size is ≤62,500, how many contracts are required to be purchased or sold in order to fully hedge against the pound exposure? (Assume no basis risk).