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

Explain how hedging affects risk and return.Use a diagram to stress your points.In your answer differentiate between routine hedging and hedging selectively.

Which of the following statements is true?

Which of the following statements is true?

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

What is a difference between a forward contract and a future contract?

An FI has reduced its interest rate risk exposure to the lowest possible level by selling sufficient futures to offset the risk exposure of its whole balance sheet or cash positions in each asset and liability.The FI is involved in:

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

In a 'plain Vanilla swap' the swap buyer agrees to make:

An interest rate swap is a succession of forward contracts on interest rates arranged by two parties that allows for the exchange of fixed-interest payments for floating payments; as such, it allows an FI to place a long-term hedge.

Which of the following is a common use of FRAs?

Which of the following statements is true?

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 statements is true?

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

A forward contract 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.