Exam 23: Managing Risk Off the Balance Sheet With Derivative Securities

A bank wishes to hedge its $30 million face value bond portfolio (currently priced at 99 percent of par). The bond portfolio has a duration of 9.75 years. It will hedge with T-bond futures ($100,000 face)priced at 98 percent of par. The duration of the T-bonds to be delivered is nine years. How many contracts are needed to hedge? Should the contracts be bought or sold? Ignore basis risk.

Swaps are usually the best hedging tool to use to hedge long-term risks of four or five years or more.

A spot contract is an immediate delivery versus payment contract.

In 2013,only about _____ of the largest banks actively used derivatives.

The maximum gain (ignoring commissions and taxes)from buying an at-the-money bond put option is the bond price at time of option purchase less the put premium. The maximum loss is the put premium.

A forward contract

A U.S. corporation has a yen-denominated loan it must repay in six months. A long position in yen futures could help offset the corporation's foreign exchange risk.

An FI has long-term fixed-rate assets funded by short-term variable-rate liabilities. To protect the equity value,the FI may engage in a swap to pay a _____ rate and receive a _____ interest.

A _____ position in T-bond futures should be used to hedge falling interest rates and a _____ position in T-bond futures should be used to hedge falling bond prices.

A bank with a negative repricing gap could enter into a swap to pay a fixed rate of interest and receive a variable rate of interest to effectively reduce its repricing gap.

Basis risk occurs because it is generally impossible to

Plain vanilla interest rate swaps are exchanges of

The buyer of an American-style bond call option has the right,but not the obligation,to sell the bond at a set price until the option expires.

After conducting a rate-sensitive analysis,a bank finds itself with the following amounts of rate-sensitive assets and liabilities (RSAs and RSL)and fixed-rate assets and liabilities (FRAs and FRLs); the rate of return and cost rates on the accounts are also given: If the bank wishes to set up a swap to totally hedge the interest rate risk,the bank should

An FI with D_A < kD_L may choose to enter into a long-term swap in which it pays a fixed rate of interest and receives a variable rate in order to effectively reduce the duration gap.

An FI has D_A = 2.45 years and kD_L = 0.97 years. The FI has total assets equal to $375 million. The FI wishes to effectively reduce the duration gap to one year by hedging with T-bond futures that have a market value of $115,000 and a D_Fut = 8 years. How many contracts are needed and should the FI buy or sell them? (D = Duration)

A U.S. bank has deposit liabilities denominated in euros that must be repaid in two years. The deposits pay a fixed interest rate of 4 percent. The bank took the money raised and converted it to dollars,whereupon it lent the dollars to a corporate customer that will repay the bank over the next two years in dollars at a variable rate of interest equal to LIBOR +3 percent. The interest rate earned may change every six months.

A bondholder owns 15-year government bonds with a $5 million face value and a 6 percent coupon that is paid annually. The bonds are currently priced at $550,018.73 with a yield of 5.034 percent. The bonds have a duration of 10.53 years. If interest rates are projected to increase by 50 basis points,how much will the bondholder gain or lose?

Your firm has sold long-term government bonds short on a when-issued basis; your firm must purchase the bonds and deliver them when they are issued in six months. To hedge this risk,you could I. buy at-the-money put options on bonds. II. sell bond futures contracts. III. write at-the-money call options on bonds.

The writer of an American-style bond call option has the right,but not the obligation,to buy the bond at a preset price until the option expires.