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

Which of the following statements is true?

Which of the following statements is true?

Basis risk is a residual risk that arises because the movement in a spot (cash) asset's price is not perfectly correlated with the movement in the price of the asset delivered under a futures or forward contract.

Off-market swaps are swaps that are have non-standard terms that require one party to compensate another so the swap can be tailored to the needs of the transacting parties; compensation is usually in the form of an upfront fee or payment.

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

A ...is an agreement between a buyer and seller at time 0, when there is a contractual agreement that an asset will be exchanged for cash at some later date.

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.

Which of the following statements is true?

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

A ...is a standardised contract guaranteed by organised exchanges to deliver and pay for an asset in the future.

...is the process by which the prices on outstanding futures contracts are adjusted each day to reflect current futures market conditions.

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.

When calculating the number of hedges required for a position, the number should always be rounded up to cover the full position.

Firm-specific risk is a residual risk that arises because the movement in a spot (cash) asset's price is not perfectly correlated with the movement in the price of the asset delivered under a futures or forward contract.

It is possible to create a synthetic fixed-rate position from floating-rate instruments using futures contracts.Forward contracts cannot be used.

The buyer of a bond call option:

An Australian bank must pay US$10 million in 90 days.It wishes to hedge the risk in the futures market.To do so, the bank should:

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?

An undeliverable futures contract refers to a futures contract in which: