Exam 25: Derivatives and Hedging Risk

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Futures market transactions are used to reduce risk.Risk may not be totally offset if:

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E

Comparing long-term bonds with short-term bonds, long-term bonds are _____ volatile and therefore experience _____ price change than short-term bonds for the same interest rate shift.

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C

A mortgage banker had made loan commitments for $10 million in 3 months.How many contracts on Treasury bonds futures must the banker write or buy?

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B

Derivatives can be used to either hedge or speculate.These actions:

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A miller who needs wheat to mill to flour uses the futures market to protect a profit by:

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A futures contract on gold states that buyers and sellers agree to make or take delivery of an ounce of gold for $400 per ounce.The contract expires in 3 months.The current price of gold is $400 per ounce.If the price of gold rises and continues to rise every day over the 3 month period, then when the contract is settled, the buyer will _____ and the seller will _____.

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Which of the following terms is not part of a forward contract?

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An inverse floater and a super-inverse floater are more valuable to a purchaser if:

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LIBOR stands for:

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Futures contracts contrast with forward contracts by:

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Assets Duration Market Value Overnight Money 0.0 \3 Million 1-year T-Bonds 0.6 \ 8 Million Loans 2.20 \ 20 Million Mortgages 7.50 \ 8 Million Liabilities Duration Market Value Checking Accounts 0.0 \ 20 Million Short-term CD's 0.4 \ 4 Million Long-term CD's 3.20 \ 12 Million Equity \3 Million -What new asset duration will immunize the balance sheet?

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The main difference between a forward contract and a cash transaction is:

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If a firm sells a floor at 6% this will:

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Duration is defined as the weighted average time to maturity of a financial instrument.Explain how this knowledge can help protect against interest rate risk.

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Interest rate and currency swaps allow one party to exchange a:

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You hold a forward contract to take delivery of U.S.Treasury bonds in 9 months.If the entire term structure of interest rates shifts down over the 9-month period, the value of the forward contract will have _____ on the date of delivery.

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A set of bonds all have the same maturity.Which one has the least percentage price change for given shifts in interest rates:

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Hedging in the futures markets can reduce all risk if:

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Exotic derivatives are complicated blends of other derivatives.Some exotics are:

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Calculate the duration of a 7-year $1,000 zero-coupon bond with a current price of $399.63 and a yield to maturity of 14%.

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