Exam 25: Derivatives and Hedging Risk

You hold a forward contract to take delivery of U.S. Treasury bonds in 9 months. If the entire term structure of interest rates shifts down over the 9-month period,the value of the forward contract will have _____ on the date of delivery.

Interest rate and currency swaps allow one party to exchange a:

Duration is defined as the weighted average time to maturity of a financial instrument. Explain how this knowledge can help protect against interest rate risk.

In percentage terms,higher coupon bonds experience a _______ price change compared with lower coupon bonds of the same maturity given a change in yield to maturity.

If the producer of a product has entered into a fixed price sale agreement for that output,the producer faces:

There are always ___ counterparties in a credit default swap:

Calculate the duration of Tiger State Bank's assets and liabilities.

Futures market transactions are used to reduce risk. Risk may not be totally offset if:

Suppose you agree to purchase one ounce of gold for $984 any time over the next month. The current price of gold is $970. The spot price of gold then falls to $960 the next day. If the agreement is represented by a futures contract marking to market on a daily basis as the price changes,what is your cash flow at the end of the next business day?

A farmer with wheat in the fields and who uses the futures market to protect a profit is an example of:

Calculate the duration of a 4-year $1,000 face value bond,which pays 8% coupons annually throughout maturity and has a yield to maturity of 9%.

You have taken a short position in a futures contract on corn at $2.60 per bushel. Over the next 5 days the contract settled at 2.52,2.57,2.62,2.68,and 2.70. You then decide to reverse your position in the futures market on the fifth day at close. What is the net amount you receive at the end of 5 days?

Duration of a coupon paying bond is:

Which of the following terms is not part of a forward contract?

Suppose you agree to purchase one ounce of gold for $382 any time over the next month. The current price of gold is $380. The spot price of gold then falls to $377 the next day. If the agreement is represented by a futures contract marking to market on a daily basis as the price changes,what is your cash flow at the end of the next business day?

A bank has a $80 million mortgage bond risk position which it hedges in the Treasury bond futures markets at the Chicago Board of Trade. Approximately how many contracts are needed to be held in the hedge?

A savings and loan has extremely long-term assets that are currently matched against extremely short-term liabilities. For this S&L:

You bought a futures contract for $2.60 per bushel and the contract ended at $2.70 after several days of trading with the following close prices each day: $2.52,$2.57,$2.62,$2.68,and $2.70. What would the mark to market sequence be?

A pure discount bond pays:

Credit default swaps: