Question 1

Which of the following best describes a derivative contract?

Accepted Answer

A) Contractual commitments to make a loan up to a stated amount at a given interest rate in the future. 
B) Contingent guarantees sold by an FI to underwrite the performance of the buyer of the guaranty. 
C) Agreement between two parties to exchange a standard quantity of an asset at a predetermined price at a specified date in the future. 
D) Trading in securities prior to their actual issue. 
A) Contractual commitments to make a loan up to a stated amount at a given interest rate in the future. 
B) Contingent guarantees sold by an FI to underwrite the performance of the buyer of the guaranty. 
C) Agreement between two parties to exchange a standard quantity of an asset at a predetermined price at a specified date in the future. 
D) Trading in securities prior to their actual issue.

Question 2

A company is considering using futures contracts to hedge an identified interest rate exposure on its debt facilities.However, it is concerned about the impact of basis risk.All of the following statements regarding basis risk are correct, except:

Accepted Answer

A) basis risk is the difference between prices in the physical market and the price of the relevant futures market contract. 
B) the existence of basis risk removes the opportunity for a perfect borrowing hedge. 
C) initial basis will be evident while the market is of the view that physical market prices will remain stable. 
D) final basis will exist where a futures contract is used to hedge a risk associated with a different physical market product. 
A) basis risk is the difference between prices in the physical market and the price of the relevant futures market contract. 
B) the existence of basis risk removes the opportunity for a perfect borrowing hedge. 
C) initial basis will be evident while the market is of the view that physical market prices will remain stable. 
D) final basis will exist where a futures contract is used to hedge a risk associated with a different physical market product.

Question 3

Forwards are on-balance-sheet transactions.

Accepted Answer

A) True 
 B)False

Question 4

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 5

Explain the differences between using futures and options contracts to hedge interest rate risk.Use diagrams where possible to support your points.

Accepted Answer

To understand the differences between us

Question 6

Partially hedging the gap or individual assets and liabilities is referred to as?

Accepted Answer

A) hedging arbitrarily 
B) hedging selectively 
C) hedging partially 
D) hedging naively 
A) hedging arbitrarily 
B) hedging selectively 
C) hedging partially 
D) hedging naively

Question 7

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 
A) spot contract 
B) forward contract 
C) futures contract 
D) put options contract

Question 8

Assume that the price paid by the buyer of a forward is $82 000 and further assume that the spot price of purchasing the hedged underlying asset at delivery date is $85 000.What is the result for the forward seller?

Accepted Answer

A) The result is a $3000 profit. 
B) The result is a $3000 loss. 
C) The answer depends on how the forward price develops over time. 
D) There is too little information to answer the question. 
A) The result is a $3000 profit. 
B) The result is a $3000 loss. 
C) The answer depends on how the forward price develops over time. 
D) There is too little information to answer the question.

Question 9

In a put option, the purchaser of the bond option is committed to handing over the specified bond at a specified time.

Accepted Answer

A) True 
 B)False

Question 10

A forward contract:

Accepted Answer

A) has more credit risk than a futures contract 
B) is more standardised 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 standardised 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 11

Within the futures market, to be fully hedged means:

Accepted Answer

A) Buying a sufficient number of futures contracts so that the loss of net worth on the FI's balance sheet when interest rates rise is just offset by the gain from the off-balance-sheet selling of futures when interest rates rise. 
B) Selling a sufficient number of futures contracts so that the loss of net worth on the FI's balance sheet when interest rates rise is just offset by the gain from the off-balance-sheet selling of futures when interest rates rise. 
C) Selling a sufficient number of futures contracts so that the gain of net worth on the FI's balance sheet when interest rates rise is just offset by the gain from the off-balance-sheet selling of futures when interest rates rise. 
D) None of the listed options are correct. 
A) Buying a sufficient number of futures contracts so that the loss of net worth on the FI's balance sheet when interest rates rise is just offset by the gain from the off-balance-sheet selling of futures when interest rates rise. 
B) Selling a sufficient number of futures contracts so that the loss of net worth on the FI's balance sheet when interest rates rise is just offset by the gain from the off-balance-sheet selling of futures when interest rates rise. 
C) Selling a sufficient number of futures contracts so that the gain of net worth on the FI's balance sheet when interest rates rise is just offset by the gain from the off-balance-sheet selling of futures when interest rates rise. 
D) None of the listed options are correct.

Question 12

A futures contract:

Accepted Answer

A) is tailor made to fit the needs of the buyer and the seller 
B) has more price 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 
A) is tailor made to fit the needs of the buyer and the seller 
B) has more price 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

Question 13

All call options are eventually exercised and the underlying asset must be delivered.

Accepted Answer

A) True 
 B)False

Question 14

Basis risk occurs on a loan commitment because the spread of a pricing index over the cost of funds may vary.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is true?

Accepted Answer

A) A very actively traded spot contract is the spot rate agreement (SR
A) . 
B) A very actively traded spot contract is the futures rate agreement (FR
A) . 
C) A very actively traded forward contract is the forward rate agreement (FR
A) , commonly used to lock in the interest rate on shorter term borrowings. 
D) A very actively traded spot contract is the option rate agreement (OR
A) , commonly used to grant the right to buy or sell an asset at a specified price. 
A) A very actively traded spot contract is the spot rate agreement (SR
A) . 
B) A very actively traded spot contract is the futures rate agreement (FR
A) . 
C) A very actively traded forward contract is the forward rate agreement (FR
A) , commonly used to lock in the interest rate on shorter term borrowings. 
D) A very actively traded spot contract is the option rate agreement (OR
A) , commonly used to grant the right to buy or sell an asset at a specified price.

Question 16

Financial futures are used by FIs to manage:

Accepted Answer

A) credit risk 
B) interest rate risk 
C) liquidity risk 
D) sovereign country risk 
A) credit risk 
B) interest rate risk 
C) liquidity risk 
D) sovereign country risk

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

A ...is a (non-standard) contract between two parties to deliver and pay for an asset in the future.

Accepted Answer

A) call option 
B) put option 
C) forward contract 
D) swap 
A) call option 
B) put option 
C) forward contract 
D) swap

Question 19

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 20

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

Which of the following best describes a derivative contract?

A company is considering using futures contracts to hedge an identified interest rate exposure on its debt facilities.However, it is concerned about the impact of basis risk.All of the following statements regarding basis risk are correct, except:

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?

Explain the differences between using futures and options contracts to hedge interest rate risk.Use diagrams where possible to support your points.

Partially hedging the gap or individual assets and liabilities is referred to as?

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:

Assume that the price paid by the buyer of a forward is $82 000 and further assume that the spot price of purchasing the hedged underlying asset at delivery date is $85 000.What is the result for the forward seller?

In a put option, the purchaser of the bond option is committed to handing over the specified bond at a specified time.

A forward contract:

Within the futures market, to be fully hedged means:

A futures contract:

All call options are eventually exercised and the underlying asset must be delivered.

Basis risk occurs on a loan commitment because the spread of a pricing index over the cost of funds may vary.

Which of the following statements is true?

Financial futures are used by FIs to manage:

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

A ...is a (non-standard) contract between two parties to deliver and pay for an asset in the future.

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?

A major difference between a forward and a futures contract:

Why Are Financial Institutions Special

The Financial Service Industry: Depository Institutions

The Financial Service Industry: Other Financial Institutions

Risks of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Securitisation

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 Risks

Capital Management and Adequacy

Filters

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

Which of the following best describes a derivative contract?

A company is considering using futures contracts to hedge an identified interest rate exposure on its debt facilities.However, it is concerned about the impact of basis risk.All of the following statements regarding basis risk are correct, except:

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?

Explain the differences between using futures and options contracts to hedge interest rate risk.Use diagrams where possible to support your points.

Partially hedging the gap or individual assets and liabilities is referred to as?

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:

Assume that the price paid by the buyer of a forward is $82 000 and further assume that the spot price of purchasing the hedged underlying asset at delivery date is $85 000.What is the result for the forward seller?

In a put option, the purchaser of the bond option is committed to handing over the specified bond at a specified time.

A forward contract:

Within the futures market, to be fully hedged means:

A futures contract:

All call options are eventually exercised and the underlying asset must be delivered.

Basis risk occurs on a loan commitment because the spread of a pricing index over the cost of funds may vary.

Which of the following statements is true?

Financial futures are used by FIs to manage:

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

A ...is a (non-standard) contract between two parties to deliver and pay for an asset in the future.

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?

A major difference between a forward and a futures contract:

Why Are Financial Institutions Special

The Financial Service Industry: Depository Institutions

The Financial Service Industry: Other Financial Institutions

Risks of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Securitisation

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 Risks

Capital Management and Adequacy

Filters