Question 1

What new asset duration will immunize the statement of financial positionif the duration of the liabilities are 1.111?

Accepted Answer

Given D_L = 1.111,then

Question 2

You have taken a short position in a futures contract on corn at $2.60 per bushel.Over the next 5 days the contract settled at 2.52,2.57,2.62,2.68,2.70.Before you can reverse your position in the futures market on the fifth day you are notified to accept delivery.What will you receive on delivery and what is the net amount you receive in total?

Accepted Answer

A)  $2.60; $2.70 
B)  $2.70; -$0.10 
C)  $2.70; $2.60 
D)  $2.60; $0.10 
E)  $2.60; -$0.10 
A)  $2.60; $2.70 
B)  $2.70; -$0.10 
C)  $2.70; $2.60 
D)  $2.60; $0.10 
E)  $2.60; -$0.10

Question 3

On March 1,you contract to take delivery of 1 ounce of gold for $495.The agreement is good for any day up to April 1.Throughout March,the price of gold hit a low of $425 and hit a high of $535.The price settled on March 31 at $505,and on April 1st you settle your futures agreement at that price.Your net cash flow is:

Accepted Answer

A)  -$30. 
B)  -$20. 
C)  -$15. 
D)  $10. 
E)  $20. 
A)  -$30. 
B)  -$20. 
C)  -$15. 
D)  $10. 
E)  $20.

Question 4

A bank has a $50 million mortgage bond risk position which it hedges in the Treasury bond futures markets at the Chicago Board of Trade.Approximately how many contracts are needed to be held in the hedge?

Accepted Answer

A)  5 contracts. 
B)  50 contracts. 
C)  500 contracts. 
D)  5,000 contracts. 
E)  50,000 contracts. 
A)  5 contracts. 
B)  50 contracts. 
C)  500 contracts. 
D)  5,000 contracts. 
E)  50,000 contracts.

Question 5

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

Accepted Answer

A)  increase risk in both cases. 
B)  decrease risk in both cases. 
C)  spread or minimize risk in both cases. 
D)  offsets risk by hedging and increase risk by speculating. 
E)  offset risks by speculating and increase risk by hedging. 
A)  increase risk in both cases. 
B)  decrease risk in both cases. 
C)  spread or minimize risk in both cases. 
D)  offsets risk by hedging and increase risk by speculating. 
E)  offset risks by speculating and increase risk by hedging.

Question 6

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?

Accepted Answer

A)  Go short 10. 
B)  Go short 100. 
C)  Go long 10. 
D)  Go long 100. 
A)  Go short 10. 
B)  Go short 100. 
C)  Go long 10. 
D)  Go long 100.

Question 7

If rates in the market fall between now and one month from now,the mortgage banker:

Accepted Answer

A)  loses as the mortgages are sold at a discount. 
B)  gains as the mortgages are sold at a discount. 
C)  loses as the mortgages are sold at a premium. 
D)  gains as the mortgages are sold at a premium. 
A)  loses as the mortgages are sold at a discount. 
B)  gains as the mortgages are sold at a discount. 
C)  loses as the mortgages are sold at a premium. 
D)  gains as the mortgages are sold at a premium.

Question 8

Hedging in the futures markets can reduce all risk if:

Accepted Answer

A)  price movements in both the cash and futures markets are perfectly correlated. 
B)  price movements in both the cash and futures markets have zero correlation. 
C)  price movements in both the cash and futures markets are less than perfectly correlated. 
D)  the hedge is a short hedge, but not a long hedge. 
E)  the hedge is a long hedge, but not a short hedge. 
A)  price movements in both the cash and futures markets are perfectly correlated. 
B)  price movements in both the cash and futures markets have zero correlation. 
C)  price movements in both the cash and futures markets are less than perfectly correlated. 
D)  the hedge is a short hedge, but not a long hedge. 
E)  the hedge is a long hedge, but not a short hedge.

Question 9

Two key features of futures contracts that make them more in demand than forward contracts are:

Accepted Answer

A)  futures are traded on exchanges and must be marked to the market. 
B)  futures contracts allow flexibility in delivery dates and provide a liquid market for netting positions. 
C)  futures are marked to the market and allow delivery flexibility. 
D)  futures are traded in liquid markets and are marked to the market. 
A)  futures are traded on exchanges and must be marked to the market. 
B)  futures contracts allow flexibility in delivery dates and provide a liquid market for netting positions. 
C)  futures are marked to the market and allow delivery flexibility. 
D)  futures are traded in liquid markets and are marked to the market.

Question 10

There are always _________ counterparties in a credit default swap.

Accepted Answer

A)  zero 
B)  one 
C)  two 
D)  three 
A)  zero 
B)  one 
C)  two 
D)  three

Question 11

You hold a forward contract to take delivery of Government of Canada 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.

Accepted Answer

A)  risen 
B)  fallen 
C)  not changed 
D)  either risen or fallen, depending on the maturity of the T-bond 
E)  collapsed 
A)  risen 
B)  fallen 
C)  not changed 
D)  either risen or fallen, depending on the maturity of the T-bond 
E)  collapsed

Question 12

Suppose you agree to purchase one ounce of gold for $984 any time over the next month.The current price of gold is $970.The spot price of gold then falls to $960 the next day.If the agreement is represented by a futures contract marking to market on a daily basis as the price changes,what is your cash flow at the end of the next business day?

Accepted Answer

A)  $10 
B)  $5 
C)  $0 
D)  -$5 
E)  -$10 
A)  $10 
B)  $5 
C)  $0 
D)  -$5 
E)  -$10

Question 13

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%.

Accepted Answer

Duration of a zero i

Question 14

You have taken a short position in a futures contract on corn at $2.60 per bushel.Over the next 5 days the contract settled at 2.52,2.57,2.62,2.68,2.70.You then decide to reverse your position in the futures market on the fifth day at close.What is the net amount you receive at the end of 5 days?

Accepted Answer

A)  $2.70 
B)  $2.60 
C)  $2.80 
D)  $0.00 
A)  $2.70 
B)  $2.60 
C)  $2.80 
D)  $0.00

Question 15

A forward contract is described by:

Accepted Answer

A)  agreeing today to buy a product at a later date at a price to be set in the future. 
B)  agreeing today to buy a product today at its current price. 
C)  agreeing today to buy a product at a later date at a price set today. 
D)  agreeing today to buy a product if and only if its price rises above the exercise price today at its current price. 
A)  agreeing today to buy a product at a later date at a price to be set in the future. 
B)  agreeing today to buy a product today at its current price. 
C)  agreeing today to buy a product at a later date at a price set today. 
D)  agreeing today to buy a product if and only if its price rises above the exercise price today at its current price.

Question 16

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.

Accepted Answer

Duration measures effective time to reco

Question 17

Credit default swaps:

Accepted Answer

A)  will pay the holder the LIBOR interest rate. 
B)  pay the borrower the LIBOR interest rate. 
C)  are like insurance against a loss of value if the firm defaults on a bond. 
D)  limit the amount of borrowing of all parties in the credit default swap. 
A)  will pay the holder the LIBOR interest rate. 
B)  pay the borrower the LIBOR interest rate. 
C)  are like insurance against a loss of value if the firm defaults on a bond. 
D)  limit the amount of borrowing of all parties in the credit default swap.

Question 18

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

Accepted Answer

A)  interest rates stay the same. 
B)  interest rates fall. 
C)  interest rates rise. 
D)  if held for a long time. 
A)  interest rates stay the same. 
B)  interest rates fall. 
C)  interest rates rise. 
D)  if held for a long time.

Question 19

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

Accepted Answer

A)  only the cash transaction creates an obligation to perform. 
B)  a forward is performed at a later date while the cash transaction is performed immediately. 
C)  only one involves a deliverable instrument. 
D)  neither allows for hedging. 
A)  only the cash transaction creates an obligation to perform. 
B)  a forward is performed at a later date while the cash transaction is performed immediately. 
C)  only one involves a deliverable instrument. 
D)  neither allows for hedging.

Question 20

If you bought a futures contract for $2.60 per bushel and the contract ended at $2.70 after several days of trading of $2.52,$2.57,$2.62,$2.68,and $2.70.What would the mark to market sequence be?

Accepted Answer

A)  -.08, .05, .05, .06, .02 
B)  .08, -.05, -.05, -.06, -.02 
C)  .08, .03, -.02, -.06, -.10 
D)  -.08, -.03, .02, .06, .10 
E)  .10 
A)  -.08, .05, .05, .06, .02 
B)  .08, -.05, -.05, -.06, -.02 
C)  .08, .03, -.02, -.06, -.10 
D)  -.08, -.03, .02, .06, .10 
E)  .10

Exam 26: Derivatives and Hedging Risk

What new asset duration will immunize the statement of financial positionif the duration of the liabilities are 1.111?

A bank has a $50 million mortgage bond risk position which it hedges in the Treasury bond futures markets at the Chicago Board of Trade.Approximately how many contracts are needed to be held in the hedge?

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

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?

If rates in the market fall between now and one month from now,the mortgage banker:

Hedging in the futures markets can reduce all risk if:

Two key features of futures contracts that make them more in demand than forward contracts are:

There are always _________ counterparties in a credit default swap.

You hold a forward contract to take delivery of Government of Canada 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.

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%.

You have taken a short position in a futures contract on corn at $2.60 per bushel.Over the next 5 days the contract settled at 2.52,2.57,2.62,2.68,2.70.You then decide to reverse your position in the futures market on the fifth day at close.What is the net amount you receive at the end of 5 days?

A forward contract is described by:

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.

Credit default swaps:

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

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

If you bought a futures contract for $2.60 per bushel and the contract ended at $2.70 after several days of trading of $2.52,$2.57,$2.62,$2.68,and $2.70.What would the mark to market sequence be?

Introduction to Corporate Finance

Accounting Statements and Cash Flow

Financial Planning and Growth

Financial Markets and Net Present Value: First Principles of Finance

The Time Value of Money

How to Value Bonds and Stocks

Net Present Value and Other Investment Rules

Net Present Value and Capital Budgeting

Risk Analysis,real Options,and Capital Budgeting

Risk and Return: Lessons From Market History

Risk and Return: the Capital Asset Pricing Model

An Alternative View of Risk and Return: the Arbitrage Pricing Theory

Risk,return,and Capital Budgeting

Corporate Financing Decisions and Efficient Capital Markets

Long-Term Financing: an Introduction

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Issuing Equity Securities to the Public

Long-Term Debt

Leasing

Options and Corporate Finance: Basic Concepts

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Short-Term Finance and Planning

Cash Management

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Financial Distress

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