Exam 14: Investment Banking,Insurance,and Other Sources of Fee Income

The realized return to a bank from a combined cash and futures market trading operation is composed of which of the following elements?

The Kromwell Community Bank's asset portfolio has an average duration of 6 years and its liability portfolio has an average duration of 2.5 years.The bank has $500 million in total assets and $450 million in liabilities.The Kromwell Community Bank is thinking about hedging its risk by using a Treasury Bond futures contract whose underlying's duration is 7.5 years and has a price of $98,000.How many futures contracts will it need to hedge its risk?

A financial institution that goes long in the futures market:

A financial institution goes _________________________ in the futures market by buying a futures contract.

A(n)_________________________ is an agreement between two parties where they agree to exchange,based on a predetermined agreement,amounts in different currencies.It is designed to reduce exchange rate risks.

The part of an agreement which allows one or both parties to make certain changes to the agreement or eliminate the agreement is called:

The long hedge in financial futures contracts is most likely to be used in situations where a bank would suffer losses due to rising interest rates.

Zenith Company has borrowed $1 million from Strong Capital Bank at an interest rate of LIBOR plus 2 percent.However,the CFO of Zenith fears that the short-term interest rates may rise in the near future and purchases an interest-rate cap of 5 percent from Strong Capital Bank.What will be the annual interest outflow for Zenith,if the LIBOR rate rises to 3.5 percent?

An interest rate collar sets both,a minimum and a maximum interest rate on a variable rate loan agreement.

A(n)_________________________ is where there is both a minimum and a maximum interest rate set on a loan.

An effective hedge is one where the positive or negative returns earned in the cash market are approximately offset by the profit or loss from futures trading.

_________________________ is the difference in interest rates (or prices)between the cash market and the futures market on an underlying security.

Most options today are traded on a(n)________________________.These options are standardized to make offsetting an existing position easier.

Which of the following is a characteristic of a swap buyer?

Many banks are not only users of derivative products but also dealers.

The underlying on the Eurodollar futures contract is the:

A financial institution with a negative gap can reduce the risk of loss due to changing interest rates by:

U.S.Treasury bond futures contracts call for the future delivery of U.S.T-bonds with minimum denominations of $100,000 and minimum maturities of 15 years.

One of the significant disadvantages of using futures contracts to hedge against interest rate risk is the high commissions that must be paid to brokers.

An interest-rate ________ would protect the swap party receiving a floating-rate payment in a swap.