Question 1

Routine hedging will allow the FI to achieve greater return from the assets and liabilities on the balance sheet.

Accepted Answer

A) True 
 B)False

Question 2

Hedging selectively only a portion of the balance sheet is an attempt to increase the return of the FI by accepting some level of interest rate risk.

Accepted Answer

A) True 
 B)False

Question 3

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 should be the trading price of the BP futures contract at the end of the year in order for the FI to be perfectly hedged? That is, the FI earns its original anticipated spread without any effects of exchange rate changes?

Accepted Answer

A) $1.60/≤. 
B) $1.61/≤. 
C) $1.62/≤. 
D) $1.63/≤. 
E) $1.64/≤. 
A) $1.60/≤. 
B) $1.61/≤. 
C) $1.62/≤. 
D) $1.63/≤. 
E) $1.64/≤.

Question 4

Futures contracts are standard in terms of all of the following EXCEPT

Accepted Answer

A) contract size. 
B) delivery month. 
C) specific asset to be delivered. 
D) trading hours. 
E) daily price limits. 
A) contract size. 
B) delivery month. 
C) specific asset to be delivered. 
D) trading hours. 
E) daily price limits.

Question 5

Immunizing the balance sheet against interest rate risk means that gains (losses) from an off-balance-sheet hedge will exactly offset losses (gains) from the balance sheet position.

Accepted Answer

A) True 
 B)False

Question 6

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

Question 7

A forward contract

Accepted Answer

A) has more credit risk than a futures contract. 
B) is more standardized than a futures contract. 
C) is marked to market more frequently than a futures contract. 
D) has a shorter time to delivery than a futures contract. 
E) is less risky than a futures contract. 
A) has more credit risk than a futures contract. 
B) is more standardized than a futures contract. 
C) is marked to market more frequently than a futures contract. 
D) has a shorter time to delivery than a futures contract. 
E) is less risky than a futures contract.

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

The primary benefit of a futures exchange is

Accepted Answer

A) always knowing its exact location. 
B) indemnifying counterparties against credit or default risk. 
C) guarantee of trading volume. 
D) intervention on the trader's behalf with government regulators. 
E) availability of free legal services. 
A) always knowing its exact location. 
B) indemnifying counterparties against credit or default risk. 
C) guarantee of trading volume. 
D) intervention on the trader's behalf with government regulators. 
E) availability of free legal services.

Question 10

Financial futures can be used by FIs to manage

Accepted Answer

A) credit risk. 
B) interest rate risk. 
C) liquidity risk. 
D) foreign exchange risk. 
E) Answers A, B, and D only. 
A) credit risk. 
B) interest rate risk. 
C) liquidity risk. 
D) foreign exchange risk. 
E) Answers A, B, and D only.

Question 11

An agreement between a buyer and a seller at time 0 to exchange a standardized, pre-specified asset for cash at a specified later date is characteristic of a

Accepted Answer

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

Question 12

If Treasury bond futures prices are currently 89-00/32nds, what is the value of the Treasury bond futures hedge position?

Accepted Answer

A) $30,000,000. 
B) $28,387,500. 
C) $26,700,000. 
D) $89,000,000. 
E) $890,000. 
A) $30,000,000. 
B) $28,387,500. 
C) $26,700,000. 
D) $89,000,000. 
E) $890,000.

Question 13

Tailing-the-hedge normally requires an FI manager to utilize more futures contracts to hedge a cash position than are warranted by the initial analysis.

Accepted Answer

A) True 
 B)False

Question 14

The current price of June $100,000 T-Bonds trading on the Chicago Board of Trade is 109-24. What is the price to be paid if the contract is delivered in June?

Accepted Answer

A) $107,240. 
B) $109,240. 
C) $109,750. 
D) $110,250. 
E) $115,760. 
A) $107,240. 
B) $109,240. 
C) $109,750. 
D) $110,250. 
E) $115,760.

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

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 exchange rate remains the same, what is the dollar spread earned by the bank at the end of the year?

Accepted Answer

A) $750,000. 
B) $1,000,000. 
C) $1,250,000. 
D) $1,600,000. 
E) $1,750,000. 
A) $750,000. 
B) $1,000,000. 
C) $1,250,000. 
D) $1,600,000. 
E) $1,750,000.

Question 17

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

Question 18

The Financial Accounting Standards Board requires that all derivatives be marked-to-market with any losses and gains transparent on FI's financial statements.

Accepted Answer

A) True 
 B)False

Question 19

What is the reason for decrease in the number of futures contract needed to hedge a cash position in case of tailing the hedge?

Accepted Answer

A) Lower average transaction costs resulting from higher number of transactions. 
B) Interest income generated from reinvesting the cash flows generated by the futures contracts. 
C) Lack of perfect correlation between spot and futures prices. 
D) The effect of conversion factor. 
E) Hedging only a proportion of balance sheet position. 
A) Lower average transaction costs resulting from higher number of transactions. 
B) Interest income generated from reinvesting the cash flows generated by the futures contracts. 
C) Lack of perfect correlation between spot and futures prices. 
D) The effect of conversion factor. 
E) Hedging only a proportion of balance sheet position.

Question 20

Forward contracts are individually negotiated and, therefore, can be unique.

Accepted Answer

A) True 
 B)False

Exam 22: Futures and Forwards

Routine hedging will allow the FI to achieve greater return from the assets and liabilities on the balance sheet.

Hedging selectively only a portion of the balance sheet is an attempt to increase the return of the FI by accepting some level of interest rate risk.

Futures contracts are standard in terms of all of the following EXCEPT

Immunizing the balance sheet against interest rate risk means that gains (losses) from an off-balance-sheet hedge will exactly offset losses (gains) from the balance sheet position.

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

A forward contract

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

The primary benefit of a futures exchange is

Financial futures can be used by FIs to manage

An agreement between a buyer and a seller at time 0 to exchange a standardized, pre-specified asset for cash at a specified later date is characteristic of a

If Treasury bond futures prices are currently 89-00/32nds, what is the value of the Treasury bond futures hedge position?

Tailing-the-hedge normally requires an FI manager to utilize more futures contracts to hedge a cash position than are warranted by the initial analysis.

The current price of June $100,000 T-Bonds trading on the Chicago Board of Trade is 109-24. What is the price to be paid if the contract is delivered in June?

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

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 exchange rate remains the same, what is the dollar spread earned by the bank at the end of the year?

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

The Financial Accounting Standards Board requires that all derivatives be marked-to-market with any losses and gains transparent on FI's financial statements.

What is the reason for decrease in the number of futures contract needed to hedge a cash position in case of tailing the hedge?

Forward contracts are individually negotiated and, therefore, can be unique.

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 Treasury bond futures prices are currently 89-00/32^nds, what is the value of the Treasury bond futures hedge position?