Question 1

The uniform guidelines issued by bank regulators for trading in futures and forwards

Accepted Answer

A) require a bank to establish trading limits. 
B) require a bank to disclose large contract positions. 
C) require a bank to establish internal guidelines regarding hedging activities. 
D) All of the options are correct. 
E) None of the options. 
A) require a bank to establish trading limits. 
B) require a bank to disclose large contract positions. 
C) require a bank to establish internal guidelines regarding hedging activities. 
D) All of the options are correct. 
E) None of the options.

Question 2

The sensitivity of the price of a futures contract depends on the duration of the deliverable asset underlying the contract.

Accepted Answer

A) True 
 B)False

Question 3

The covariance of the change in spot exchange rates and the change in futures exchange rates is 0.6060, and the variance of the change in futures exchange rates is 0.5050.What is the estimated hedge ratio for this currency?

Accepted Answer

A) 0.306. 
B) 0.694. 
C) 1.440. 
D) 1.200. 
E) 0.833. 
A) 0.306. 
B) 0.694. 
C) 1.440. 
D) 1.200. 
E) 0.833.

Question 4

Forward contracts are marked-to-market on a daily basis.

Accepted Answer

A) True 
 B)False

Question 5

91-day Treasury bill rates = 9.71 percent 91-day Treasury bill futures rates = 9.66 percent
(Reminder: Treasury bill prices are calculated using the following formula:
P = FV × (1 - dt/360)
Where P = price, FV = face value, d = discount yield, and t = days until maturity.)
An investor sold a $100,000 Treasury bond futures contract at 99-02/32nds yesterday.Today the Treasury bond futures settlement price is 99-31/32nds.What is the one-day profit or loss on the Treasury bond futures position?

Accepted Answer

A) A profit of $906.25. 
B) A loss of $906.25. 
C) A profit of $733. 
D) A loss of $733. 
E) A loss of $290. 
A) A profit of $906.25. 
B) A loss of $906.25. 
C) A profit of $733. 
D) A loss of $733. 
E) A loss of $290.

Question 6

A futures contract has only one payment cash flow that occurs at the time of delivery.

Accepted Answer

A) True 
 B)False

Question 7

Conyers Bank holds U.S.Treasury bonds with a book value of $30 million.However, the U.S.Treasury bonds currently are worth $28,387,500. If the portfolio manager wants to shorten the bank's asset maturity, what type of risk is she concerned about?

Accepted Answer

A) Credit risk. 
B) Foreign exchange rate risk. 
C) The risk of rising interest rates. 
D) The risk of falling interest rates. 
E) Default risk. 
A) Credit risk. 
B) Foreign exchange rate risk. 
C) The risk of rising interest rates. 
D) The risk of falling interest rates. 
E) Default risk.

Question 8

Hedging effectiveness often is measured by the squared correlation between past changes in the spot asset prices and futures prices.

Accepted Answer

A) True 
 B)False

Question 9

When will the estimated hedge ratio be greater than one?

Accepted Answer

A) When spot rate changes are greater than futures rate changes. 
B) When spot rate changes are less sensitive than futures price changes over time. 
C) When spot rate changes are equally sensitive as futures price changes over time. 
D) When basis risk is absent. 
E) When the spot and future exchange rates are expected to move perfectly together. 
A) When spot rate changes are greater than futures rate changes. 
B) When spot rate changes are less sensitive than futures price changes over time. 
C) When spot rate changes are equally sensitive as futures price changes over time. 
D) When basis risk is absent. 
E) When the spot and future exchange rates are expected to move perfectly together.

Question 10

In a credit forward contract transaction

Accepted Answer

A) the credit forward buyer is the lender who is trying to hedge the loan. 
B) the credit forward seller is the lender who is trying to hedge the loan. 
C) the credit forward buyer will pay the credit forward seller if the credit spread at the maturity of the forward contract is less than at the initiation of the contract. 
D) the credit forward seller will pay the credit forward buyer if the credit spread at the maturity of the forward contract is greater than at the initiation of the contract. 
E) the characteristics of the benchmark bond must be the same as those of the bank's loan to the borrower. 
A) the credit forward buyer is the lender who is trying to hedge the loan. 
B) the credit forward seller is the lender who is trying to hedge the loan. 
C) the credit forward buyer will pay the credit forward seller if the credit spread at the maturity of the forward contract is less than at the initiation of the contract. 
D) the credit forward seller will pay the credit forward buyer if the credit spread at the maturity of the forward contract is greater than at the initiation of the contract. 
E) the characteristics of the benchmark bond must be the same as those of the bank's loan to the borrower.

Question 11

Hedging a specific on-balance-sheet cash position usually will only require more T-bill futures contracts than hedging the same cash position with T-bond futures contracts because the T-bond contract size is only 10 percent as large as large as the T-bill contract.

Accepted Answer

A) True 
 B)False

Question 12

The terms of futures contracts traded in the U.S.are set by the exchange on which they propose to be traded, but are subject to approval by the

Accepted Answer

A) Federal Reserve. 
B) Commodity Futures Trading Commission. 
C) CME Group (formerly Chicago Mercantile Exchange). 
D) Chicago Board of Trade. 
E) Securities and Exchange Commission. 
A) Federal Reserve. 
B) Commodity Futures Trading Commission. 
C) CME Group (formerly Chicago Mercantile Exchange). 
D) Chicago Board of Trade. 
E) Securities and Exchange Commission.

Question 13

The use of futures contracts by banks is subject to risk-based capital guidelines through the off-balance-sheet risk calculations for risk-based capital.

Accepted Answer

A) True 
 B)False

Question 14

What is overhedging?

Accepted Answer

A) Selectively hedging a proportion of an FI's balance sheet position. 
B) Choosing to bear some interest rate risk as well as credit and FX risks. 
C) Reducing the risk to the lowest level possible. 
D) Using more hedge vehicles than is necessary to offset the risk in the cash asset. 
E) Partially hedging the individual assets and liabilities. 
A) Selectively hedging a proportion of an FI's balance sheet position. 
B) Choosing to bear some interest rate risk as well as credit and FX risks. 
C) Reducing the risk to the lowest level possible. 
D) Using more hedge vehicles than is necessary to offset the risk in the cash asset. 
E) Partially hedging the individual assets and liabilities.

Question 15

Routine hedging will allow the FI to achieve greater return from the assets and liabilities on the balance sheet.

Accepted Answer

A) True 
 B)False

Question 16

The average duration of the loans is 10 years.The average duration of the deposits is 3 years. $$\begin{array} { | l | r | l | r | } 
\hline \text { Consumer loans } & \$ 50 \text { million } & \text { Deposits } & \$ 235 \text { million } \
\hline \text { Commercial Loans } & \$ 200 \text { million } & \text { Equity } & \$ 15 \text { million } \
\hline \text { Total Assets } & \$ 250 \text { million } & \text { Total Liabilities \& Equity } & \$ 250 \text { million } \
\hline
\end{array}$$ What is the number of T-bond futures contracts necessary to hedge the balance sheet if the duration of the deliverable bonds is 9 years and the current price of the futures contract is $96 per $100 face value?

Accepted Answer

A) 1,630 contracts. 
B) 1,475 contracts. 
C) 1,900 contracts. 
D) 2,078 contracts. 
E) 3,225 contracts. 
A) 1,630 contracts. 
B) 1,475 contracts. 
C) 1,900 contracts. 
D) 2,078 contracts. 
E) 3,225 contracts.

Question 17

Basis risk occurs when the underlying security in the futures contract is not the same asset as the cash asset on the balance sheet.

Accepted Answer

A) True 
 B)False

Question 18

The notational value of the world-wide credit derivative securities markets stood at _________ trillion as of 2015, which compares to _________ trillion as of July 2008.

Accepted Answer

A) $22.6; $54.6 
B) $13.2; $31.2 
C) $31.2; $16.8 
D) $7.8; $14.7 
E) $16.0; $27.4 
A) $22.6; $54.6 
B) $13.2; $31.2 
C) $31.2; $16.8 
D) $7.8; $14.7 
E) $16.0; $27.4

Question 19

Which of the following is NOT true regarding hedge ratio?

Accepted Answer

A) When there is no basis risk hedge ratio is equal to one. 
B) When h = 1, both spot and futures are expected to change together by the same absolute amount. 
C) When h = 1, FX risk of the cash position should be hedged dollar for dollar by buying FX futures. 
D) When basis risk is present, the spot and future exchange rates are expected to move imperfectly together. 
E) The FI must sell a greater number of futures when there is basis risk than it has to when basis risk is absent. 
A) When there is no basis risk hedge ratio is equal to one. 
B) When h = 1, both spot and futures are expected to change together by the same absolute amount. 
C) When h = 1, FX risk of the cash position should be hedged dollar for dollar by buying FX futures. 
D) When basis risk is present, the spot and future exchange rates are expected to move imperfectly together. 
E) The FI must sell a greater number of futures when there is basis risk than it has to when basis risk is absent.

Question 20

An agreement between a buyer and a seller at time 0 where the seller of an asset agrees to deliver an asset immediately and the buyer agrees to pay for the asset immediately is the characteristic of a

Accepted Answer

A) spot contract. 
B) forward contract. 
C) futures contract. 
D) put options contract. 
E) call options contract. 
A) spot contract. 
B) forward contract. 
C) futures contract. 
D) put options contract. 
E) call options contract.

Exam 23: Futures and Forwards

The uniform guidelines issued by bank regulators for trading in futures and forwards

The sensitivity of the price of a futures contract depends on the duration of the deliverable asset underlying the contract.

The covariance of the change in spot exchange rates and the change in futures exchange rates is 0.6060, and the variance of the change in futures exchange rates is 0.5050.What is the estimated hedge ratio for this currency?

Forward contracts are marked-to-market on a daily basis.

A futures contract has only one payment cash flow that occurs at the time of delivery.

Conyers Bank holds U.S.Treasury bonds with a book value of $30 million.However, the U.S.Treasury bonds currently are worth $28,387,500. If the portfolio manager wants to shorten the bank's asset maturity, what type of risk is she concerned about?

Hedging effectiveness often is measured by the squared correlation between past changes in the spot asset prices and futures prices.

When will the estimated hedge ratio be greater than one?

In a credit forward contract transaction

Hedging a specific on-balance-sheet cash position usually will only require more T-bill futures contracts than hedging the same cash position with T-bond futures contracts because the T-bond contract size is only 10 percent as large as large as the T-bill contract.

The terms of futures contracts traded in the U.S.are set by the exchange on which they propose to be traded, but are subject to approval by the

The use of futures contracts by banks is subject to risk-based capital guidelines through the off-balance-sheet risk calculations for risk-based capital.

What is overhedging?

Routine hedging will allow the FI to achieve greater return from the assets and liabilities on the balance sheet.

Basis risk occurs when the underlying security in the futures contract is not the same asset as the cash asset on the balance sheet.

The notational value of the world-wide credit derivative securities markets stood at _________ trillion as of 2015, which compares to _________ trillion as of July 2008.

Which of the following is NOT true regarding hedge ratio?

An agreement between a buyer and a seller at time 0 where the seller of an asset agrees to deliver an asset immediately and the buyer agrees to pay for the asset immediately is the characteristic of a

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The notational value of the world-wide credit derivative securities markets stood at _ trillion as of 2015, which compares to _ trillion as of July 2008.