Exam 13: Risk Management With Financial Derivatives

Explain using an example the statement that "at the expiration date of a futures contract, the price of the contract is the same as the price of the underlying asset to be delivered."

If you bought a long contract on financial futures, you hope that interest rates ________.

If you buy a European call option on Canada bonds with a strike price of 110 assuming that the premium is $0, and on the maturity date the market price of Canada bonds is 117, you will ________ the option in order to make a profit of $________.

Financial derivatives include ________.

The elimination of riskless profit opportunities in the futures market is referred to as ________.

if you buy an option to buy Canada futures at 110, and at expiration the market price is 115, ________.

If you sold a short futures contract, you will hope that bond prices ________.

If you buy a European call option on Canada bonds with a strike price of 115 assuming that the premium is $0, and on the maturity date the market price of Canada bonds is 110, you will ________ the option and potentially make a profit of $________.

Forward contracts do not suffer from the problem of ________.

A short position requires that the investor ________.

If you sell in March a bond future contract for 115 that matures on June 30 of the same year, and at the maturity date the same future sells for 110, you have a ________ of $________.

If a firm is due to be paid in euros in two months, to hedge against exchange rate risk the firm should ________.

Futures markets have grown rapidly because futures ________.

If Second Bank has more rate-sensitive assets than rate sensitive liabilities, it can reduce interest rate risk with a swap which requires Second Bank to ________.

If you buy in March a bond future contract for 150 that matures on June 30 of the same year, and on the maturity date the same future sells for 170, you have a ________ of $________.

If a bank has a gap of -$10 million, it can reduce its interest rate risk by ________.

If a bank manager wants to protect the bank against losses that would be incurred on its portfolio of treasury securities should interest rates rise, he could ________.

If you buy in April a stock index future contract on the S&P 500 index at the price of 1050 points that matures on June 30 of the same year and on the maturity date the S&P 500 Index is at 1047, you have a ________ of $________.

Explain the terms hedge, long position and short position in the context of managing financial institutions' risk.

If a money manager believes stock prices will fall and knows that a block of funds will be received in the future, then he should ________.