Question 1

As interest rates increase, the writer of a bond call option stands to make:

Accepted Answer

A) limited gains. 
B) limited losses. 
C) unlimited losses. 
D) unlimited gains. 
A) limited gains. 
B) limited losses. 
C) unlimited losses. 
D) unlimited gains. A

Question 2

Which of the following statements is true?

Accepted Answer

A) The mismatches between changes in the price of the exposure and the value of the instrument used to hedge the position is called value risk. 
B) The mismatches between changes in the price of the exposure and the value of the instrument used to hedge the position is called basis risk. 
C) The mismatches between changes in the price of the exposure and the value of the instrument used to hedge the position is called gap risk. 
D) The mismatches between changes in the price of the exposure and the value of the instrument used to hedge the position is called fundamental risk. 
A) The mismatches between changes in the price of the exposure and the value of the instrument used to hedge the position is called value risk. 
B) The mismatches between changes in the price of the exposure and the value of the instrument used to hedge the position is called basis risk. 
C) The mismatches between changes in the price of the exposure and the value of the instrument used to hedge the position is called gap risk. 
D) The mismatches between changes in the price of the exposure and the value of the instrument used to hedge the position is called fundamental risk. B

Question 3

Which of the following are contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a pre-specified price for a specified time period?

Accepted Answer

A) options 
B) futures 
C) forwards 
D) swaps 
A) options 
B) futures 
C) forwards 
D) swaps A

Question 4

A major difference between a forward and a futures contract:

Accepted Answer

A) is the forward has less credit risk than a futures contract. 
B) is the forward contract is tailor-made to fit the needs of the buyer. 
C) is the forward contract is marked to market more frequently than a futures contract. 
D) is the forward contract rarely has final delivery of the asset. 
A) is the forward has less credit risk than a futures contract. 
B) is the forward contract is tailor-made to fit the needs of the buyer. 
C) is the forward contract is marked to market more frequently than a futures contract. 
D) is the forward contract rarely has final delivery of the asset.

Question 5

Which of the following statements is true?

Accepted Answer

A) In a futures contract, daily cash flows pass, via the clearing house, between the buyer and seller in response to the mark-to-market process. 
B) In a forward contract, daily cash flows pass, via the clearing house, between the buyer and seller in response to the mark-to-market process. 
C) In a futures contract, daily cash flows pass, via the clearing house, between the buyer and seller in response to the mark-to-book value process. 
D) In a forward contract, daily cash flows pass, via the clearing house, between the buyer and seller in response to the mark-to-book value process. 
A) In a futures contract, daily cash flows pass, via the clearing house, between the buyer and seller in response to the mark-to-market process. 
B) In a forward contract, daily cash flows pass, via the clearing house, between the buyer and seller in response to the mark-to-market process. 
C) In a futures contract, daily cash flows pass, via the clearing house, between the buyer and seller in response to the mark-to-book value process. 
D) In a forward contract, daily cash flows pass, via the clearing house, between the buyer and seller in response to the mark-to-book value process.

Question 6

Which of the following statements is true?

Accepted Answer

A) Marking to market refers to the process by which the prices on outstanding futures contracts are adjusted each hour to reflect current futures market conditions. 
B) Marking to market refers to the process by which the prices on outstanding futures contracts are adjusted each day to reflect current futures market conditions. 
C) Marking to market refers to the process by which the prices on outstanding futures contracts are adjusted each week to reflect current futures market conditions. 
D) A Marking to market refers to the process by which the prices on outstanding futures contracts are adjusted each month to reflect current futures market conditions. 
A) Marking to market refers to the process by which the prices on outstanding futures contracts are adjusted each hour to reflect current futures market conditions. 
B) Marking to market refers to the process by which the prices on outstanding futures contracts are adjusted each day to reflect current futures market conditions. 
C) Marking to market refers to the process by which the prices on outstanding futures contracts are adjusted each week to reflect current futures market conditions. 
D) A Marking to market refers to the process by which the prices on outstanding futures contracts are adjusted each month to reflect current futures market conditions.

Question 7

For a currency that has a futures contract, basis risk is not typically a problem as $1 is the same as any other $1.

Accepted Answer

A) True 
 B)False

Question 8

Some futures exchanges have deliverable bond futures, meaning that at the contract's expiry holders of bought futures positions must take physical delivery and sellers must make delivery.

Accepted Answer

A) True 
 B)False

Question 9

The dollar value of the outstanding futures position depends on the:

Accepted Answer

A) number of contracts bought and sold and the price of each contract. 
B) cash exposure ratio. 
C) number of contracts bought and sold and the change in interest rates. 
D) contracts that should be sold per dollar of cash exposure. 
A) number of contracts bought and sold and the price of each contract. 
B) cash exposure ratio. 
C) number of contracts bought and sold and the change in interest rates. 
D) contracts that should be sold per dollar of cash exposure.

Question 10

Buying a call option (standing ready to buy bonds at the exercise price) is a strategy that a FI may take when bond prices rise and interest rates are expected to fall.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following is true of the market price of a futures contract over time?

Accepted Answer

A) It is set at time 0. 
B) It is fixed over the life of the contract. 
C) It changes based on the market value of the underlying asset. 
D) It decreases with time to expiration. 
A) It is set at time 0. 
B) It is fixed over the life of the contract. 
C) It changes based on the market value of the underlying asset. 
D) It decreases with time to expiration.

Question 12

The writer of a bond call option:

Accepted Answer

A) receives a premium and must stand ready to sell the bond at the exercise price. 
B) receives a premium and must stand ready to buy bonds at the exercise price. 
C) pays a premium and has the right to sell the underlying bond at the agreed exercise price. 
D) pays a premium and has the right to buy the underlying bond at the agreed exercise price. 
A) receives a premium and must stand ready to sell the bond at the exercise price. 
B) receives a premium and must stand ready to buy bonds at the exercise price. 
C) pays a premium and has the right to sell the underlying bond at the agreed exercise price. 
D) pays a premium and has the right to buy the underlying bond at the agreed exercise price.

Question 13

An FI portfolio manager holds 10 year $1 million face value bonds.At time 0, these bonds are valued at $95 per $100 of face value and the manager expects interest rates to rise over the next three months.What should the manager do?

Accepted Answer

A) The FI portfolio manager should leave the position untouched as changes in the interest rate have no impact on bond prices. 
B) The FI portfolio manager should leave the position untouched as an increase in interest rates will lead to higher bond prices. 
C) The FI portfolio manager should hedge the position by selling a three months forward contract with a face value of $1 million. 
D) The FI portfolio manager should hedge the position by buying a three months forward contract with a face value of $1 million. 
A) The FI portfolio manager should leave the position untouched as changes in the interest rate have no impact on bond prices. 
B) The FI portfolio manager should leave the position untouched as an increase in interest rates will lead to higher bond prices. 
C) The FI portfolio manager should hedge the position by selling a three months forward contract with a face value of $1 million. 
D) The FI portfolio manager should hedge the position by buying a three months forward contract with a face value of $1 million.

Question 14

Which of the following is an adequate definition of conversion factor?

Accepted Answer

A) A factor used to calculate the invoice price on a futures contract when a bond other than the benchmark bond is delivered to the buyer. 
B) A factor used to calculate the invoice price on a futures contract when the benchmark bond is delivered to the buyer. 
C) A factor used to calculate the invoice price on a futures contract when a bond other than the benchmark bond is delivered to the seller. 
D) A factor used to calculate the invoice price on a futures contract when the benchmark bond is delivered to the seller. 
A) A factor used to calculate the invoice price on a futures contract when a bond other than the benchmark bond is delivered to the buyer. 
B) A factor used to calculate the invoice price on a futures contract when the benchmark bond is delivered to the buyer. 
C) A factor used to calculate the invoice price on a futures contract when a bond other than the benchmark bond is delivered to the seller. 
D) A factor used to calculate the invoice price on a futures contract when the benchmark bond is delivered to the seller.

Question 15

Which of the following is a reason why the default risk of a futures contract is assumed to be less than that of a forward contract?

Accepted Answer

A) Forward contracts are classified as exotic derivatives. 
B) Margin requirements on futures. 
C) More flexibility as the buyer can decide whether or not to exercise the contract at maturity. 
D) None of the listed options are correct, as the default risk of a futures contract is generally considered to be higher than that of a forward contract. 
A) Forward contracts are classified as exotic derivatives. 
B) Margin requirements on futures. 
C) More flexibility as the buyer can decide whether or not to exercise the contract at maturity. 
D) None of the listed options are correct, as the default risk of a futures contract is generally considered to be higher than that of a forward contract.

Question 16

Forwards are on-balance-sheet transactions.

Accepted Answer

A) True 
 B)False

Question 17

In June, an investor finds out that in September she will receive $10 million to invest in three month maturity securities.In June, the 91-day Treasury bill rate is 5.50 per cent.What is the investor's profit (loss) if the 91-day rate falls to 5.20 per cent in September?

Accepted Answer

A) The investor loses $30 000 because of the 30 basis point decline in interest rates. 
B) The investor gains $30 000 because of the 30 basis point decline in interest rates. 
C) The investor gains $7583 because of the 30 basis point decline in interest rates. 
D) The investor loses $7583 because of the 30 basis point decline in interest rates. 
A) The investor loses $30 000 because of the 30 basis point decline in interest rates. 
B) The investor gains $30 000 because of the 30 basis point decline in interest rates. 
C) The investor gains $7583 because of the 30 basis point decline in interest rates. 
D) The investor loses $7583 because of the 30 basis point decline in interest rates.

Question 18

In June, an investor finds out that in September she will receive $10 million to invest in three month maturity securities.In June, the 91-day Treasury bill rate is 5.50 per cent.If the investor uses 10 T-bill futures contracts to hedge the interest rate risk, should she take a long or a short hedge? What are the returns on the futures hedge if there is no basis risk?

Accepted Answer

A) She earns $30 000 on the short futures hedge. 
B) She earns $30 000 on the long futures hedge. 
C) She earns $7500 on the short futures hedge. 
D) She earns $7500 on the long futures hedge. 
A) She earns $30 000 on the short futures hedge. 
B) She earns $30 000 on the long futures hedge. 
C) She earns $7500 on the short futures hedge. 
D) She earns $7500 on the long futures hedge.

Question 19

The Sydney Futures Exchange only offers cash-settled contracts.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following statements is true?

Accepted Answer

A) If a cash asset is hedged on a dollar for dollar basis with a forward or futures contract, we refer to this hedge as a dollar hedge. 
B) If a cash asset is hedged on a dollar for dollar basis with a forward or futures contract, we refer to this hedge as a plain hedge. 
C) If a cash asset is hedged on a dollar for dollar basis with a forward or futures contract, we refer to this hedge as a naive hedge. 
D) All of the listed options are correct. 
A) If a cash asset is hedged on a dollar for dollar basis with a forward or futures contract, we refer to this hedge as a dollar hedge. 
B) If a cash asset is hedged on a dollar for dollar basis with a forward or futures contract, we refer to this hedge as a plain hedge. 
C) If a cash asset is hedged on a dollar for dollar basis with a forward or futures contract, we refer to this hedge as a naive hedge. 
D) All of the listed options are correct.

As interest rates increase, the writer of a bond call option stands to make:

Which of the following statements is true?

Which of the following are contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a pre-specified price for a specified time period?

A major difference between a forward and a futures contract:

Which of the following statements is true?

Which of the following statements is true?

For a currency that has a futures contract, basis risk is not typically a problem as $1 is the same as any other $1.

Some futures exchanges have deliverable bond futures, meaning that at the contract's expiry holders of bought futures positions must take physical delivery and sellers must make delivery.

The dollar value of the outstanding futures position depends on the:

Buying a call option (standing ready to buy bonds at the exercise price) is a strategy that a FI may take when bond prices rise and interest rates are expected to fall.

Which of the following is true of the market price of a futures contract over time?

The writer of a bond call option:

An FI portfolio manager holds 10 year $1 million face value bonds.At time 0, these bonds are valued at $95 per $100 of face value and the manager expects interest rates to rise over the next three months.What should the manager do?

Which of the following is an adequate definition of conversion factor?

Which of the following is a reason why the default risk of a futures contract is assumed to be less than that of a forward contract?

Forwards are on-balance-sheet transactions.

In June, an investor finds out that in September she will receive $10 million to invest in three month maturity securities.In June, the 91-day Treasury bill rate is 5.50 per cent.What is the investor's profit (loss) if the 91-day rate falls to 5.20 per cent in September?

The Sydney Futures Exchange only offers cash-settled contracts.

Which of the following statements is true?

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: The Duration Model

Credit Risk I: Individual Loan Risk

Market Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risk

Capital Management and Adequacy

Filters

Exam 7: Managing Interest Rate Risk Using Off Balance Sheet Instruments

As interest rates increase, the writer of a bond call option stands to make:

Which of the following statements is true?

Which of the following are contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a pre-specified price for a specified time period?

A major difference between a forward and a futures contract:

Which of the following statements is true?

Which of the following statements is true?

For a currency that has a futures contract, basis risk is not typically a problem as $1 is the same as any other $1.

Some futures exchanges have deliverable bond futures, meaning that at the contract's expiry holders of bought futures positions must take physical delivery and sellers must make delivery.

The dollar value of the outstanding futures position depends on the:

Buying a call option (standing ready to buy bonds at the exercise price) is a strategy that a FI may take when bond prices rise and interest rates are expected to fall.

Which of the following is true of the market price of a futures contract over time?

The writer of a bond call option:

An FI portfolio manager holds 10 year $1 million face value bonds.At time 0, these bonds are valued at $95 per $100 of face value and the manager expects interest rates to rise over the next three months.What should the manager do?

Which of the following is an adequate definition of conversion factor?

Which of the following is a reason why the default risk of a futures contract is assumed to be less than that of a forward contract?

Forwards are on-balance-sheet transactions.

In June, an investor finds out that in September she will receive $10 million to invest in three month maturity securities.In June, the 91-day Treasury bill rate is 5.50 per cent.What is the investor's profit (loss) if the 91-day rate falls to 5.20 per cent in September?

The Sydney Futures Exchange only offers cash-settled contracts.

Which of the following statements is true?

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: The Duration Model

Credit Risk I: Individual Loan Risk

Market Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Off-Balance-Sheet Activities

Technology and Other Operational Risk

Capital Management and Adequacy

Filters