A) Selectively hedging a proportion of an FI's balance sheet position. B) Choosing to bear some interest rate risk as well as credit and FX risks. C) Reducing the risk to the lowest level possible. D) Using more hedge vehicles than is necessary to offset the risk in the cash asset. E) Partially hedging the individual assets and liabilities. A) Selectively hedging a proportion of an FI's balance sheet position. B) Choosing to bear some interest rate risk as well as credit and FX risks. C) Reducing the risk to the lowest level possible. D) Using more hedge vehicles than is necessary to offset the risk in the cash asset. E) Partially hedging the individual assets and liabilities.

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 leveraged-adjusted duration gap of the bank's portfolio?

A) 10 years. B) 7.3 years. C) 7 years. D) 7.18 years. E) 3 years. A) 10 years. B) 7.3 years. C) 7 years. D) 7.18 years. E) 3 years.

Exam 22: Futures and Forwards

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?

(Multiple Choice)

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Question 81

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

(True/False)

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Question 82

Who are the common buyers of credit forwards?

(Multiple Choice)

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Question 83

As of June 2012, commercial banks held more forward contracts than futures contracts for trading.

(True/False)

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Question 84

What is overhedging?

(Multiple Choice)

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Question 85

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. -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 US $0.765 per Canadian dollar (Assume no change in U.S. interest rates.) (Choose the closest answer)

(Multiple Choice)

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Question 86

Futures contracts are the primary security that insurance companies and banks use to hedge interest rate risk prior to originating mortgages.

(True/False)

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Question 87

Commercial banks, investment banks, and broker-dealers are the major forward market participants.

(True/False)

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Question 88

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 leveraged-adjusted duration gap of the bank's portfolio?

(Multiple Choice)

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Question 89

Microhedging uses futures or forward contracts to hedge the entire balance sheet duration gap.

(True/False)

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Question 90

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

(Multiple Choice)

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Question 91

Federal regulations in the U.S. allow derivatives to be used only by the 25 largest banks.

(True/False)

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Question 92

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

(True/False)

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Question 93

The notational value of derivative contracts for the top 25 derivative users was less than the total credit exposure as of June 2012.

(True/False)

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Question 94

Which of the following identifies the largest group of derivative contracts as of June 2012?

(Multiple Choice)

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Question 95

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

(True/False)

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Question 96

If T-bond futures prices decrease to 81-27/32^nds, what is the value of the futures hedge position?

(Multiple Choice)

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Question 97

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

(True/False)

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Question 98

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/≤. -Assume that the hedge was placed as indicated in a prior question, and that the BP futures contract is trading at $1.62/≤. Assume the futures contract has some days remaining to maturity. What will be the gain or loss on the hedge if it is unwound at this price?

(Multiple Choice)

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Question 99

Historical analysis of recent changes in exchange rates in both the spot and futures markets for a given currency reveals that spot rates are thirty percent more sensitive than futures prices. Given this information, the hedge ratio for this currency is

(Multiple Choice)

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Question 100

Showing 81 - 100 of 127

Exam 22: Futures and Forwards

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

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

Who are the common buyers of credit forwards?

As of June 2012, commercial banks held more forward contracts than futures contracts for trading.

What is overhedging?

Futures contracts are the primary security that insurance companies and banks use to hedge interest rate risk prior to originating mortgages.

Commercial banks, investment banks, and broker-dealers are the major forward market participants.

Microhedging uses futures or forward contracts to hedge the entire balance sheet duration gap.

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

Federal regulations in the U.S. allow derivatives to be used only by the 25 largest banks.

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

The notational value of derivative contracts for the top 25 derivative users was less than the total credit exposure as of June 2012.

Which of the following identifies the largest group of derivative contracts as of June 2012?

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

If T-bond futures prices decrease to 81-27/32nds, what is the value of the futures hedge position?

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

Historical analysis of recent changes in exchange rates in both the spot and futures markets for a given currency reveals that spot rates are thirty percent more sensitive than futures prices. Given this information, the hedge ratio for this currency is

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters

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?

If T-bond futures prices decrease to 81-27/32^nds, what is the value of the futures hedge position?