Question 1

Give an example where an interest rate swap would benefit both counterparties.

Accepted Answer

The answer of Give an example where an interest rate...

Question 2

Which of the following would generally not be considered a speculator?

Accepted Answer

A)  Hedger 
B)  Day trader 
C)  Scalper 
D)  Position trader 
E)  All of these are consider speculators.

Question 3

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 4

When the net profit on both the futures and cash position equals zero, this is known as a(n):

Accepted Answer

A)  cross hedge. 
B)  perfect hedge. 
C)  imperfect hedge. 
D)  basis hedge. 
E)  return hedge.

Question 5

Which of the following would require a short hedge?

Accepted Answer

A)  The bank anticipates a decline in interest rates. 
B)  The bank has a positive GAP. 
C)  The bank is liability sensitive. 
D)  All of the above require a short hedge. 
E)  None of the above require a short hedge.

Question 6

Explain the concepts of cross hedging and basis risk.

Accepted Answer

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

Question 7

Your bank has a positive GAP and wants to hedge against changes in interest rates. Would a collar or reverse collar serve as a better hedge? Why?

Accepted Answer

The answer of Your bank has a positive GAP and...

Question 8

The value of a basis point for 90-day Eurodollar Time Deposit futures contract is:

Accepted Answer

A)  $10. 
B)  $100. 
C)  $25. 
D)  $250. 
E)  $500.

Question 9

Speculators focus on avoiding or reducing risk.

Accepted Answer

A) True 
 B)False

Question 10

An interest rate collar consists of:

Accepted Answer

A)  buying an interest rate cap and selling an interest rate floor. 
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 11

Forward contracts rarely require a performance guarantee or collateral.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following primarily takes futures positions that are outstanding for just minutes?

Accepted Answer

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

Question 13

Banks can often replicate on-balance sheet transactions with off-balance sheet contracts.

Accepted Answer

A) True 
 B)False

Question 14

The daily settlement process that credits gains or deducts losses from a futures customer's account is called:

Accepted Answer

A)  the variation margin. 
B)  marking-to-market. 
C)  the initial margin. 
D)  the maintenance margin. 
E)  the gain/loss ratio.

Question 15

Discuss the difference between speculating and hedging.

Accepted Answer

The answer of Discuss the difference between speculating and hedging....

Question 16

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

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is correct about futures contracts?

Accepted Answer

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

Question 18

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 19

A trader buys a 90-day Eurodollar futures contract at 95.25. The next day, interest rates fall to 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 $5,000 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.

Question 20

An investor anticipates she will have funds to invest in the T-Bill market. If she hedges by buying futures contracts and rates decline, which of the following is true?

Accepted Answer

A)  The investor will profit on the futures contract. 
B) The investor will profit in the cash market. 
C)  The investor will have locked in a minimum 10% return. 
D)  The investor will lose in the cash market. 
E)  Both a. and d. are true.

Exam 9: Using Derivatives to Manage Interest Rate Risk

Give an example where an interest rate swap would benefit both counterparties.

Which of the following would generally not be considered a speculator?

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

When the net profit on both the futures and cash position equals zero, this is known as a(n) :

Which of the following would require a short hedge?

Explain the concepts of cross hedging and basis risk.

Your bank has a positive GAP and wants to hedge against changes in interest rates. Would a collar or reverse collar serve as a better hedge? Why?

The value of a basis point for 90-day Eurodollar Time Deposit futures contract is:

Speculators focus on avoiding or reducing risk.

An interest rate collar consists of:

Forward contracts rarely require a performance guarantee or collateral.

Which of the following primarily takes futures positions that are outstanding for just minutes?

Banks can often replicate on-balance sheet transactions with off-balance sheet contracts.

The daily settlement process that credits gains or deducts losses from a futures customer's account is called:

Discuss the difference between speculating and hedging.

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

Which of the following is correct about futures contracts?

Which of the following is correct about futures contracts?

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

An investor anticipates she will have funds to invest in the T-Bill market. If she hedges by buying futures contracts and rates decline, which of the following is true?