Question 1

____________ of financial futures contracts require physical delivery.

Accepted Answer

A)  Nearly 100% 
B)  Approximately 75% 
C)  Approximately 50% 
D)  Approximately 25% 
E)  Less than 1% 
A)  Nearly 100% 
B)  Approximately 75% 
C)  Approximately 50% 
D)  Approximately 25% 
E)  Less than 1%

Question 2

In an interest rate swap, the notional principle:

Accepted Answer

A)  is the difference in the fixed and floating interest rates. 
B)  is the difference in the fixed and floating interest payments. 
C)  is used to calculate the FRA basis. 
D)  is used to calculate the value of the interest payments. 
E)  is used to calculate the hedge ratio. 
A)  is the difference in the fixed and floating interest rates. 
B)  is the difference in the fixed and floating interest payments. 
C)  is used to calculate the FRA basis. 
D)  is used to calculate the value of the interest payments. 
E)  is used to calculate the hedge ratio.

Question 3

An instrument that derives its value from another underlying asset is known as a(n):

Accepted Answer

A)  hedge. 
B)  derivative. 
C)  basis. 
D)  backdate agreement. 
E)  original document. 
A)  hedge. 
B)  derivative. 
C)  basis. 
D)  backdate agreement. 
E)  original document.

Question 4

The daily change in the value due to the marking-to-market process is know as the:

Accepted Answer

A)  maintenance margin. 
B)  variation margin. 
C)  market margin. 
D)  initial margin. 
E)  marked margin. 
A)  maintenance margin. 
B)  variation margin. 
C)  market margin. 
D)  initial margin. 
E)  marked margin.

Question 5

A credit default swap:

Accepted Answer

A)  transfers the credit risk in a fixed income instrument from one counterparty to another. 
B)  is not considered a credit derivative. 
C)  provides the buyer with periodic payments. 
D)  can only be traded if the seller owns the underlying instrument. 
E)  all of the above. 
A)  transfers the credit risk in a fixed income instrument from one counterparty to another. 
B)  is not considered a credit derivative. 
C)  provides the buyer with periodic payments. 
D)  can only be traded if the seller owns the underlying instrument. 
E)  all of the above.

Question 6

Which of the following is not true of forward rate agreements (FRA)?

Accepted Answer

A)  The two counterparties to an FRA agree to a notional principal. 
B)  FRAs are traded on an organized exchange. 
C)  The buyer of a FRA agrees to pay a fixed-rate coupon payment. 
D)  FRAs are not as liquid as most futures contracts. 
E)  FRAs can be used to manage interest rate risk. 
A)  The two counterparties to an FRA agree to a notional principal. 
B)  FRAs are traded on an organized exchange. 
C)  The buyer of a FRA agrees to pay a fixed-rate coupon payment. 
D)  FRAs are not as liquid as most futures contracts. 
E)  FRAs can be used to manage interest rate risk.

Question 7

What is a macrohedge?

Accepted Answer

A)  It is a hedge of the bank's aggregate portfolio. 
B)  It is a hedge using just one type of futures contract. 
C)  It is the hedge of a specific asset or liability for which the bank is exposed to interest rate risk. 
D)  It is a hedge using two or more types of futures contracts. 
E)  It is a has that has a duration of less than one month. 
A)  It is a hedge of the bank's aggregate portfolio. 
B)  It is a hedge using just one type of futures contract. 
C)  It is the hedge of a specific asset or liability for which the bank is exposed to interest rate risk. 
D)  It is a hedge using two or more types of futures contracts. 
E)  It is a has that has a duration of less than one month.

Question 8

A cross hedge often has greater risk then a perfect hedge because:

Accepted Answer

A)  futures and cash interest rates are perfectly positively correlated. 
B)  futures and cash interest rates are perfectly negatively correlated. 
C)  cross hedging uses a contract based on the identical underlying asset. 
D)  futures and cash interest rates may not move together. 
E)  b. and d. 
A)  futures and cash interest rates are perfectly positively correlated. 
B)  futures and cash interest rates are perfectly negatively correlated. 
C)  cross hedging uses a contract based on the identical underlying asset. 
D)  futures and cash interest rates may not move together. 
E)  b. and d.

Question 9

When you wish to own the underlying security, your spot position is _______.

Accepted Answer

A)  fat. 
B)  long. 
C)  short. 
D)  skinny. 
E)  a. and c. 
A)  fat. 
B)  long. 
C)  short. 
D)  skinny. 
E)  a. and c.

Question 10

Which of the following trader's strategies is to reduce risk?

Accepted Answer

A)  Scalper 
B)  Speculator 
C)  Arbitrageur 
D)  Hedger 
E)  Day trader 
A)  Scalper 
B)  Speculator 
C)  Arbitrageur 
D)  Hedger 
E)  Day trader

Question 11

Discuss the relative advantages and disadvantages of using futures versus forward contracts.

Accepted Answer

Futures and forward contracts are both f

Question 12

Every futures contract has a formal expiration date.

Accepted Answer

A) True 
 B)False

Question 13

When an interest-bearing security is the underlying asset for a futures contract, it is called:

Accepted Answer

A)  a forward contract. 
B)  an interest rate futures. 
C)  a commission futures. 
D)  a speculative futures. 
E)  an interest rate swap. 
A)  a forward contract. 
B)  an interest rate futures. 
C)  a commission futures. 
D)  a speculative futures. 
E)  an interest rate swap.

Question 14

A reverse collar consists of:

Accepted Answer

A)  buying an interest rate floor and an interest rate cap. 
B)  buying an interest rate floor and selling an interest rate cap. 
C)  selling an interest rate floor and buying an interest rate cap. 
D)  buying a call option and selling a futures contract. 
E)  selling a put option and buying a futures contract. 
A)  buying an interest rate floor and an interest rate cap. 
B)  buying an interest rate floor and selling an interest rate cap. 
C)  selling an interest rate floor and buying an interest rate cap. 
D)  buying a call option and selling a futures contract. 
E)  selling a put option and buying a futures contract.

Question 15

When you sell a futures contract, your futures position is:

Accepted Answer

A)  flat. 
B)  long. 
C)  short. 
D)  the same as the cash position. 
E)  b. and d. 
A)  flat. 
B)  long. 
C)  short. 
D)  the same as the cash position. 
E)  b. and d.

Question 16

The basis on a futures contract is defined as:

Accepted Answer

A)  the cash price minus the forward price. 
B)  the forward price minus the cash price. 
C)  the futures price minus the cash price. 
D)  the cash price minus the futures price. 
E)  None of the above. 
A)  the cash price minus the forward price. 
B)  the forward price minus the cash price. 
C)  the futures price minus the cash price. 
D)  the cash price minus the futures price. 
E)  None of the above.

Question 17

How many 90-day Eurodollar futures contracts should a bank purchase to hedge the roll-over of a 1-year, $5 million loan if loan rates and Eurodollar rates have the same volatility?

Accepted Answer

A)  1 contract 
B)  5 contracts 
C)  10 contracts 
D)  20 contracts 
E)  50 contracts 
A)  1 contract 
B)  5 contracts 
C)  10 contracts 
D)  20 contracts 
E)  50 contracts

Question 18

How can a bank hedge when it makes 1-year fixed-rate loans and finances them with 3-month floating-rate deposits?

Accepted Answer

A)  Buy Eurodollar futures contracts. 
B) Sell put options on Eurodollar futures contracts. 
C)  Sell Eurodollar futures contracts. 
D)  Buy call options on Eurodollar futures contacts. 
E)  b. and c. 
A)  Buy Eurodollar futures contracts. 
B) Sell put options on Eurodollar futures contracts. 
C)  Sell Eurodollar futures contracts. 
D)  Buy call options on Eurodollar futures contacts. 
E)  b. and c.

Question 19

A zero cost collar:

Accepted Answer

A)  is risk-free. 
B)  is designed to offset margin requirements. 
C)  has a larger premium than a reverse collar. 
D)  designed so the buyer has no net premium payment. 
E)  None of the above. 
A)  is risk-free. 
B)  is designed to offset margin requirements. 
C)  has a larger premium than a reverse collar. 
D)  designed so the buyer has no net premium payment. 
E)  None of the above.

Question 20

Banks use financial derivatives for all of the following except:

Accepted Answer

A)  hedge asset yields. 
B)  adjust maturities by creating synthetic liabilities. 
C)  adjust the sensitivity of earnings to changes in interest rates. 
D)  lock-in the cost of liabilities. 
E)  Banks use financial derivatives for all of the above. 
A)  hedge asset yields. 
B)  adjust maturities by creating synthetic liabilities. 
C)  adjust the sensitivity of earnings to changes in interest rates. 
D)  lock-in the cost of liabilities. 
E)  Banks use financial derivatives for all of the above.

____________ of financial futures contracts require physical delivery.

In an interest rate swap, the notional principle:

An instrument that derives its value from another underlying asset is known as a(n):

The daily change in the value due to the marking-to-market process is know as the:

A credit default swap:

Which of the following is not true of forward rate agreements (FRA)?

What is a macrohedge?

A cross hedge often has greater risk then a perfect hedge because:

When you wish to own the underlying security, your spot position is _______.

Which of the following trader's strategies is to reduce risk?

Discuss the relative advantages and disadvantages of using futures versus forward contracts.

Every futures contract has a formal expiration date.

When an interest-bearing security is the underlying asset for a futures contract, it is called:

A reverse collar consists of:

When you sell a futures contract, your futures position is:

The basis on a futures contract is defined as:

How many 90-day Eurodollar futures contracts should a bank purchase to hedge the roll-over of a 1-year, $5 million loan if loan rates and Eurodollar rates have the same volatility?

How can a bank hedge when it makes 1-year fixed-rate loans and finances them with 3-month floating-rate deposits?

A zero cost collar:

Banks use financial derivatives for all of the following except:

Banking and the Financial Services Industry

Government Policies and Regulation

Analyzing Bank Performance

Managing Noninterest Income and Noninterest Expense

The Performance of Nontraditional Banking Companies

Pricing Fixed-Income Securities

Managing Interest Rate Risk: Gap and Earnings Sensitivity

Managing Interest Rate Risk: Duration Gap and Economic Value of Equity

Funding the Bank

Managing Liquidity

The Effective Use of Capital

Overview of Credit Policy and Loan Characteristics

Evaluating Commercial Loan Requests and Managing Credit Risk

Evaluating Consumer Loans

Managing the Investment Portfolio

Global Banking Activities

Filters

Exam 9: Using Derivatives to Manage Interest Rate Risk

____________ of financial futures contracts require physical delivery.

In an interest rate swap, the notional principle:

An instrument that derives its value from another underlying asset is known as a(n):

The daily change in the value due to the marking-to-market process is know as the:

A credit default swap:

Which of the following is not true of forward rate agreements (FRA)?

What is a macrohedge?

A cross hedge often has greater risk then a perfect hedge because:

When you wish to own the underlying security, your spot position is _______.

Which of the following trader's strategies is to reduce risk?

Discuss the relative advantages and disadvantages of using futures versus forward contracts.

Every futures contract has a formal expiration date.

When an interest-bearing security is the underlying asset for a futures contract, it is called:

A reverse collar consists of:

When you sell a futures contract, your futures position is:

The basis on a futures contract is defined as:

How many 90-day Eurodollar futures contracts should a bank purchase to hedge the roll-over of a 1-year, $5 million loan if loan rates and Eurodollar rates have the same volatility?

How can a bank hedge when it makes 1-year fixed-rate loans and finances them with 3-month floating-rate deposits?

A zero cost collar:

Banks use financial derivatives for all of the following except:

Banking and the Financial Services Industry

Government Policies and Regulation

Analyzing Bank Performance

Managing Noninterest Income and Noninterest Expense

The Performance of Nontraditional Banking Companies

Pricing Fixed-Income Securities

Managing Interest Rate Risk: Gap and Earnings Sensitivity

Managing Interest Rate Risk: Duration Gap and Economic Value of Equity

Funding the Bank

Managing Liquidity

The Effective Use of Capital

Overview of Credit Policy and Loan Characteristics

Evaluating Commercial Loan Requests and Managing Credit Risk

Evaluating Consumer Loans

Managing the Investment Portfolio

Global Banking Activities

Filters