Question 1

Speculators take a position to reduce their risk profile.

Accepted Answer

A) True 
 B)False

Question 2

Speculators focus on avoiding or reducing risk.

Accepted Answer

A) True 
 B)False

Question 3

The "initial margin" on a futures contract:

Accepted Answer

A) is a cash deposit the buyer places with the seller as good faith money. 
B) can be cash or U.S.government securities placed with an exchange member. 
C) are U.S.government securities the buyer places with the seller for safekeeping. 
D) are the first installment on the payment for a futures contract. 
E) is the amount by which the futures contract is initially "in the money."

Question 4

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.

Question 5

Assume that two firms, one considered a high credit risk (HCR) and the other a low credit risk (LCR), are considering an interest rate swap.Each can borrow at the following rates:  An interest rate swap would be beneficial to both parties if:

Accepted Answer

A) the LCR firm wants to borrow at the fixed rate and the HCR firm wants to borrow at the variable rate. 
B) the HCR firm wants to borrow at the fixed rate and the LCR firm wants to borrow at the variable rate. 
C) both firms want to borrow at the variable rate. 
D) both firms want to borrow at the fixed rate. 
E) an interest rate swap would be never be beneficial in this situation.

Question 6

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.

Question 7

Every futures contract has a formal expiration date.

Accepted Answer

A) True 
 B)False

Question 8

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.

Question 9

"Locals" trade futures for their own account.

Accepted Answer

A) True 
 B)False

Question 10

When futures prices falls, buyers gain at the expense of sellers.

Accepted Answer

A) True 
 B)False

Question 11

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.

Question 12

Which of the following wishes to reduce risk?

Accepted Answer

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

Question 13

Explain the concepts of cross hedging and basis risk.

Accepted Answer

The answer of Explain the concepts of cross hedging and...

Question 14

Forward contracts rarely require a performance guarantee or collateral.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following is correct about futures contracts?

Accepted Answer

A) Buyers of futures contracts make a profit when prices rise. 
B) Buyers of futures contracts make a profit when interest rates rise. 
C) Sellers of futures contracts make a profit when prices rise. 
D) Sellers of futures contracts make a profit when prices interest rates fall. 
E) b.and d.

Question 16

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

Question 17

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.

Question 18

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.

Question 19

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

Accepted Answer

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

Question 20

A trader buys a 90-day Eurodollar futures contract at 95.25.The next day, interest rates fall 4.5%.Which of the following is true? Assume that the initial and maintenance margins are $5,000.

Accepted Answer

A) The trader would have to deposit an additional $62,500 into her account. 
B) The trader would have to deposit an additional $2,500 into her account. 
C) The trader would have to deposit an additional $625 into her account. 
D) The trader could withdraw $2,500 from her margin account. 
E) The trader could withdraw $625 from her margin account.

Exam 9: Using Derivatives to Manage Interest Rate Risk

Speculators take a position to reduce their risk profile.

Speculators focus on avoiding or reducing risk.

The "initial margin" on a futures contract:

The basis on a futures contract is defined as:

Assume that two firms, one considered a high credit risk (HCR) and the other a low credit risk (LCR) , are considering an interest rate swap.Each can borrow at the following rates: An interest rate swap would be beneficial to both parties if:

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

Every futures contract has a formal expiration date.

What is a macrohedge?

"Locals" trade futures for their own account.

When futures prices falls, buyers gain at the expense of sellers.

A zero cost collar:

Which of the following wishes to reduce risk?

Explain the concepts of cross hedging and basis risk.

Forward contracts rarely require a performance guarantee or collateral.

Which of the following is correct about futures contracts?

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?

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

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

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

A trader buys a 90-day Eurodollar futures contract at 95.25.The next day, interest rates fall 4.5%.Which of the following is true? Assume that the initial and maintenance margins are $5,000.