Deck 6: Techniques of Assetliability Management: Futures, Options, and Swaps

Question 1

A futures contract is a standardized agreement to buy or sell a specified quantity of a financial instrument on a specified future date at a set price.

Answer 1

True

Question 2

The buyer of a futures contract is said to have a long position

Answer 2

True

Question 3

The seller of a futures contract is said to have a short position

Answer 3

True

Question 4

Futures contracts are standardized but NOT usually traded on an organized exchange.

Question 5

The margin on a futures contract represents the amount that the buyer of the contract borrowed from a broker.

Question 6

Credit risk on a futures contract is reduced substantially by the exchange clearinghouse.

Question 7

Futures contracts are marked-to-market at the end of each month.

Question 8

Delivery of the underlying financial instrument occurs for most futures transactions.

Question 9

A long or buy hedge would usually be used if the bank would be harmed in the cash market by rising interest rates.

Question 10

A short of sell hedge would usually be used if the bank would be harmed in the cash market by rising interest rates.

Question 11

The number of contracts that need to be used to hedge a cash position is determined by the value of the cash flow to be hedged, the face value of the futures contract, the maturity of the anticipated cash flow, the maturity of the futures contract, and the ratio of the variability of the cash market to the variability of the futures market.

Question 12

In a macro hedge, the bank is hedging the entire portfolio.

Question 13

In a micro hedge, the hedge is linked directly to a specific asset.

Question 14

A bank may defer gains and losses for a macro hedge.

Question 15

Options represent contracts that provide the holder both the right and obligation to buy a security.

Question 16

A call option gives the buyer the right (but not the obligation) to buy an underlying instrument (such as a T-bill futures contract) at a specified price (called the exercise or strike price).

Question 17

As with futures markets, options contracts are standardized contracts that trade on organized exchanges.

Question 18

A bank with a positive dollar gap could buy call options in order to hedge its interest rate risk.

Question 19

A bank with a positive duration gap could sell put options in order to hedge its interest rate risk.

Question 20

An interest rate cap is a contract that reduces the exposure of a floating rate borrower (or a liability sensitive bank) to increases in interest rates.

Question 21

In an interest rate swap, both the principal and interest are exchanged.

Question 22

The principal purpose of an interest rate swap is to reduce the cost of borrowing.

Question 23

A bank with a positive dollar gap could reduce its interest rate risk by receiving fixed and paying floating in an interest rate swap.

Question 24

Differences in credit quality spreads between floating and fixed rate markets create the opportunity for both parties in an interest rate swap to lower their cost of funds.

Question 25

Futures are most commonly used for long-term adjustments in interest rate risk while swaps usually are used for short term adjustments.

Question 26

Which of the following is NOT true of a futures contract?

A) standardized agreement
B) set price to be bought or sold in the future
C) option to exercise the contract
D) specified quantity of a financial asset to be bought or sold in the future

Question 27

The seller in a futures contract is said to have a:

A) long position
B) short position
C) buying position
D) selling position

Question 28

Which of the following is unique to the cash market, as opposed to the futures market?

A) organized exchanges are used only in the cash market
B) contracts are standardized only in the cash market
C) pricing and delivery occur at the same time in the cash market
D) buyers are insured against losses only in the cash market

Question 29

What lowers the credit risk of the financial futures contracts?

A) a clearinghouse
B) insurance
C) guarantees
D) low risk securities
E) none of the above

Question 30

If the margin balance falls below the exchange mandated minimum when trading futures
Contracts, the trader will be required to add funds to the:

A) surplus fund
B) surplus margin
C) margin contract
D) margin account
E) none of the above

Question 31

If a trader buys a financial futures contract and interest rates rise, the trader will:

A) lose money
B) make a gain
C) break even

Question 32

Assume the following information is given: $1 million (face value), thirteen-week T-bill futures contract, and the final index price is 95.00. The settlement price for this contract is:

A) $987.361
B) $987,534
C) $1,012,465
D) $1,012,639
E) none of the above

Question 33

If a bank has a positive dollar gap, it could hedge its interest rate risk by:

A) buying a futures contract
B) selling a futures contract
C) buying and selling a futures contract
D) none of the above

Question 34

If a bank has a negative dollar gap and is short in T-bill futures, if interest rates fall, the _________ in the net interest margin of the bank will be ______ in the T-bill futures.

A) losses/offset by gains
B) losses/worsened by losses
C) gains/offset by loses
D) gains/increased by gains

Question 35

Suppose that a bank has a negative duration gap and interest rates are expected to fall. In this case the bank:

A) should hedge interest rate risk by going short in the futures market
B) should hedge interest rate risk by going long in the futures market
C) has no interest rate risk in the sense that the net interest margin will increase as rates fall.

Question 36

Given the following definitions:
D_rsa = duration of cash assets
D_f = the duration of deliverable securities involved in the hypothetical
futures contract from the delivery date
N_f = the number of futures contracts
FP = the futures price
V_rsa = the market value of the assets

-The correct formula for the duration of a portfolio containing both spot market assets and futures contracts is:

A) D_rsa - (D_fN_fFP/V_rsa)
B) V_rsa - (D_fN_fFP/D_rsa)
C) D_rsa + (D_fN_fFP/V_rsa)
D) V_rsa + (D_fN_fFP/D_rsa)

Question 37

Which of the following is NOT one of the steps involved in hedging the interest rate
Sensitivity position of the bank.

A) determine the length of the hedge
B) determine the depth of the hedge
C) place the hedge
D) monitor the hedge
E) lift the hedge

Question 38

Which of the following hedges is for the entire portfolio of the bank?

A) macro hedge
B) micro hedge
C) short hedge
D) long hedge
E) none of the above

Question 39

The difference between the cash and futures price of the financial instrument that is used
For a hedge is known as:

A) spread risk
B) dollar gap risk
C) duration gap risk
D) basis risk
E) none of the above

Question 40

Current accounting procedures for futures contracts are set by:

A) the Federal Reserve Board
B) Federal Deposit Insurance Corporation
C) Comptroller of the Currency
D) All of the above

Question 41

Mark-to-market is a term in the futures market that means that:

A) gains and losses are taken immediately on delivery of the contracts
B) gains and losses are taken at the end of the day on contracts
C) gains and losses are taken every hour on contracts
D) gains and losses are taken on the delivery date on contracts

Question 42

Options contracts ____________ holders to buy or sell a particular financial instrument at
A specified price on or before a specified date.

A) require
B) do not require
C) require under certain circumstances
D) require under state laws
E) require under federal laws

Question 43

From the perspective of the buyer, a call option is concerned with the ________ of a
Financial asset.

A) purchase
B) sale
C) purchase and sale
D) liquidation

Question 44

Unlike futures contracts, options contracts:

A) are traded in unorganized exchanges
B) are not standardized contracts
C) are not based on cash market contracts
D) do not require that a margin be put forward
E) none of the above, they are all true of both futures and options contracts

Question 45

The maximum amount that the buyer of an unhedged option can lose is:

A) the call premium plus the value of the option
B) the call premium
C) dependent on the price movement of the underlying asset
D) dependent on the insurance backing the option

Question 46

If a trader buys a put option, he(she) will make a profit if the price of the underlying
Asset:

A) increases
B) decreases
C) increases and then decreases
D) decreases and then increases

Question 47

Suppose the bank has a positive dollar gap and interest rates are expected to fall in the
Near future. The bank could hedge this interest rate risk by:

A) buying a call option
B) selling a call option
C) buying a put option
D) none of the above; the bank has no interest rate risk because its net interest margin will increase as rates fall

Question 48

Suppose the bank has a positive duration gap and interest rates are expected to rise in the
Near future. The bank could hedge this interest rate risk by:

A) buying a call option
B) selling a call option
C) selling a put option
D) none of the above; the bank has no interest rate risk because its interest rate margin will increase as rates rise

Question 49

In an interest rate swap two firms exchange:

A) their interest and principal obligations
B) their interest obligations only
C) their options contracts
D) their futures contracts
E) none of the above

Question 50

Interest rate swaps are intended to:

A) decrease the interest rate risk of the firms involved
B) decrease the credit risk of the firms involved
C) decrease the market risk of the firms involved
D) decrease the liquidity risk of the firms involved

Question 51

Which of the following is(are) an advantage(s) of swaps?

A) low search costs
B) customized to meet the exact needs of the parties involved
C) can be established for a long time
D) b and c
E) a, b, and c

Question 52

Another name for a swap in which a dollar fixed-rate loan is swapped for a dollar
Floating-rate loan is a ______ swap.

A) straight
B) plain vanilla
C) rate risk
D) mixed
E) none of the above

Question 53

The ______ is really a performance bond that guarantees that the buyer or seller of a
Futures contract will fulfill the commitment.

A) clearinghouse
B) margin
C) futures price
D) spot price

Question 54

Banks can use futures contracts to both speculate and hedge against future interest rate
Movements:

A) as they desire
B) according to restrictions placed on them by the clearinghouse
C) according to the restrictions placed on them by bank regulatory authorities
D) according to the restrictions placed on them by the Securities Exchange Commission

Question 55

Forward contracts differ from futures contracts in which of the following ways:

A) less standardized than futures contracts
B) traded over-the-counter (OTC) between large dealer banks (rather than on an organized exchange)
C) not marked-to-market daily as are futures contracts
D) all of the above