Exam 25: Derivatives and Hedging Risk

Assume you write a futures contract on corn at $3.74 per bushel.Over the next 5 days the contract settles at $3.68,$3.71,$3.67,$3.64,and $3.61.Before you can reverse your position in the futures market you are notified to complete delivery on Day 5.What will you receive on delivery per bushel and what is the net amount per bushel you receive in total?

The duration of a pure discount bond is:

Comparing long-term bonds with short-term bonds,long-term bonds are ________ volatile and therefore experience ________ price change than short-term bonds for the same interest rate shift.

Calculate the duration of a $1,000 zero-coupon bond with a current price of $455.59,a maturity of 6 years,and a yield to maturity of 14 percent.

Duration is a measure of the:

Which one of these bonds has the highest duration?

A bond manager who wishes to hold the bonds with the greatest potential price volatility should acquire:

Futures contracts:

A financial institution can hedge its interest rate risk by:

Firm A is paying $300,000 in fixed interest payments a year while Firm B is paying LIBOR plus 30 basis points on $5 million loans.The current LIBOR rate is 5.5 percent.Firm A and B have agreed to swap interest payments.What is the net payment between these firms this year?

Small Town Bank has total assets with a market value of $14.23 million and a duration of 2.64 years.The bank's liabilities equal $12.87 million and its equity is $1.36 million on a market value basis.To hedge interest rate risk,what duration should the bank seek for its liabilities?

A forward contract is described as agreeing today to either purchase or sell an asset or security:

Futures contracts contrast with forward contracts by:

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

Assume a firm has a floating-rate loan and purchases a 10 percent cap on that loan.As a result,the firm will receive payments equal to:

Today,you purchased two natural gas futures contracts at the settle price for a May delivery.The contract size is 10,000 MMBtu with quotes in dollars per MMBtu.The day's high was 2.954,the low was 2.939,and the settle was 2.948.What was the total amount you had to pay today?

Duration is defined as the weighted average time to maturity of a financial instrument.List at least four other key things you know about duration.

The main difference between a forward contract and a cash transaction is:

An inverse floater and a super-inverse floater probably become the most valuable to a purchaser when:

Futures market transactions are commonly used to reduce risk.The most risk reduction can be obtained when the asset at risk and the futures contract: