Question 1

A futures contract

Accepted Answer

A) is tailor-made to fit the needs of the buyer and the seller. 
B) has more credit risk than a forward contract. 
C) is marked to market more frequently than a forward contract. 
D) has a shorter time to delivery than a forward contract. 
E) has more price risk than a forward contract. 
A) is tailor-made to fit the needs of the buyer and the seller. 
B) has more credit risk than a forward contract. 
C) is marked to market more frequently than a forward contract. 
D) has a shorter time to delivery than a forward contract. 
E) has more price risk than a forward contract.

Question 2

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 
B) Net seller 
A) Net buyer 
B) Net seller

Question 3

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?

Accepted Answer

A) Gain of $2,583,125. 
B) Loss of $93,750. 
C) Loss of $2,583,125. 
D) Gain of $93,750. 
E) Gain of $812,700. 
A) Gain of $2,583,125. 
B) Loss of $93,750. 
C) Loss of $2,583,125. 
D) Gain of $93,750. 
E) Gain of $812,700.

Question 4

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. 
E) All of the above. 
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. 
E) All of the above.

Question 5

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 bank's portfolio manager wants to shorten asset maturities. Which of the following statements is true?

Accepted Answer

A) The portfolio manager is reluctant to sell the bonds outright since the bank will have to take a loss. 
B) The portfolio manager is willing to sell the bonds outright since they are not as valuable as their book value. 
C) The portfolio manager is willing to sell the bonds outright since they are more valuable than their book value. 
D) The portfolio manager is reluctant to sell the bonds outright since the bank will have to pay taxes on the gain. 
E) None of the above. 
A) The portfolio manager is reluctant to sell the bonds outright since the bank will have to take a loss. 
B) The portfolio manager is willing to sell the bonds outright since they are not as valuable as their book value. 
C) The portfolio manager is willing to sell the bonds outright since they are more valuable than their book value. 
D) The portfolio manager is reluctant to sell the bonds outright since the bank will have to pay taxes on the gain. 
E) None of the above.

Question 6

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 7

A U.S. FI wishes to hedge a €10,000,000 loan using euro currency futures. Each euro futures contract is for 125,000 euros, and the hedge ratio is 1.40. The loan is payable in one year in euros.
-What type of currency hedge is necessary to protect the FI from exchange rate risk?

Accepted Answer

A)  Buy € currency futures. 
B)  Sell € currency futures. 
C)  Finance the loan with € deposits. 
D)  Finance the loan with Eurodollar deposits. 
E)  Either B or D. 
A)  Buy € currency futures. 
B)  Sell € currency futures. 
C)  Finance the loan with € deposits. 
D)  Finance the loan with Eurodollar deposits. 
E)  Either B or D.

Question 8

Catastrophe futures are designed to hedge extreme losses of natural disasters for property-casualty insurance companies.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

A U.S. FI wishes to hedge a €10,000,000 loan using euro currency futures. Each euro futures contract is for 125,000 euros, and the hedge ratio is 1.40. The loan is payable in one year in euros.
-How many currency contracts are necessary to hedge this asset?

Accepted Answer

A) 112 contracts. 
B) 57 contracts. 
C) 80 contracts. 
D) 75 contracts. 
E) 42 contracts. 
A) 112 contracts. 
B) 57 contracts. 
C) 80 contracts. 
D) 75 contracts. 
E) 42 contracts.

Question 11

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 US $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.

Accepted Answer

A) Profit of US $20,000. 
B) Loss of C $224,000 
C) Profit of US $50,000. 
D) Profit of C $63,000. 
E) Profit of US $313,000. 
A) Profit of US $20,000. 
B) Loss of C $224,000 
C) Profit of US $50,000. 
D) Profit of C $63,000. 
E) Profit of US $313,000.

Question 12

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/≤.
-What is the net gain or loss on the loan given that the exchange rates at the time of repayment were $1.63/≤ in the cash market and 1.62/≤ in the futures market? Assume that the futures position is opened and unwound as stated in previous question.

Accepted Answer

A) $2,120,000 loss. 
B) $1,330,000 loss. 
C) $2,670,000 loss. 
D) $1,330,000 gain. 
E) $2,670,000 gain. 
A) $2,120,000 loss. 
B) $1,330,000 loss. 
C) $2,670,000 loss. 
D) $1,330,000 gain. 
E) $2,670,000 gain.

Question 13

A forward contract specifies immediate delivery for immediate payment.

Accepted Answer

A) True 
 B)False

Question 14

The average duration of the loans is 10 years. The average duration of the deposits is 3 years. $$\begin{array} { | l | r | l | r | } 
\hline \text { Consumer loans } & \$ 50 \text { million } & \text { Deposits } & \$ 235 \text { million } \
\hline \text { Commercial Loans } & \$ 200 \text { million } & \text { Equity } & \$ 15 \text { million } \
\hline \text { Total Assets } & \$ 250 \text { million } & \text { Total Liabilities \& Equity } & \$ 250 \text { million } \
\hline
\end{array}$$
-What is the number of T-Bill futures contracts necessary to hedge the balance sheet if the duration of the deliverable T-bills is 0.25 years and the current price of the futures contract is $98 per $100 face value?

Accepted Answer

A) 6,212 contracts. 
B) 6,805 contracts. 
C) 6,900 contracts. 
D) 7,112 contracts. 
E) 7,327 contracts. 
A) 6,212 contracts. 
B) 6,805 contracts. 
C) 6,900 contracts. 
D) 7,112 contracts. 
E) 7,327 contracts.

Question 15

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.)
-What is the basis on the T-bill futures contract?

Accepted Answer

A) 19 basis points. 
B) 21 basis points. 
C) 5 basis points. 
D) 2 basis points. 
E) Insufficient information. 
A) 19 basis points. 
B) 21 basis points. 
C) 5 basis points. 
D) 2 basis points. 
E) Insufficient information.

Question 16

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?

Accepted Answer

A) 1.1027; $110,531. 
B) 1.2257; $135,478. 
C) 1.8370; $253,830. 
D) 1.3622; $163,339. 
E) 1.7263; $141,788. 
A) 1.1027; $110,531. 
B) 1.2257; $135,478. 
C) 1.8370; $253,830. 
D) 1.3622; $163,339. 
E) 1.7263; $141,788.

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

Routine hedging

Accepted Answer

A) is a hedging strategy that occurs on a set, predetermined basis by the FI. 
B) always results in excess returns. 
C) is a strategy to follow when interest rates are abnormally low. 
D) is a strategy used when interest rates are extremely unpredictable. 
E) is a strategy to follow when interest rates are abnormally high. 
A) is a hedging strategy that occurs on a set, predetermined basis by the FI. 
B) always results in excess returns. 
C) is a strategy to follow when interest rates are abnormally low. 
D) is a strategy used when interest rates are extremely unpredictable. 
E) is a strategy to follow when interest rates are abnormally high.

Question 19

More FIs fail due to credit risk exposure than exposure to either interest rate risk or foreign exchange risk.

Accepted Answer

A) True 
 B)False

Question 20

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.

Accepted Answer

A) True 
 B)False

Exam 22: Futures and Forwards

A futures contract

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

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?

A naive hedge occurs when

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 bank's portfolio manager wants to shorten asset maturities. Which of the following statements is true?

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

A U.S. FI wishes to hedge a €10,000,000 loan using euro currency futures. Each euro futures contract is for 125,000 euros, and the hedge ratio is 1.40. The loan is payable in one year in euros. -What type of currency hedge is necessary to protect the FI from exchange rate risk?

Catastrophe futures are designed to hedge extreme losses of natural disasters for property-casualty insurance companies.

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

A U.S. FI wishes to hedge a €10,000,000 loan using euro currency futures. Each euro futures contract is for 125,000 euros, and the hedge ratio is 1.40. The loan is payable in one year in euros. -How many currency contracts are necessary to hedge this asset?

A forward contract specifies immediate delivery for immediate payment.

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?

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

Routine hedging

More FIs fail due to credit risk exposure than exposure to either interest rate risk or foreign exchange risk.

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.

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