Exam 25: Derivatives and Hedging Risk

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In percentage terms,higher coupon bonds experience a ________ price change compared with lower coupon bonds of the same maturity given a stated change in market interest rates.

(Multiple Choice)

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Question 21

The futures markets are considered by some to be highly risky and equivalent to gambling.Why is this an inaccurate portrayal of the market's function?

(Essay)

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Question 22

Calculate the duration of a $1,000 face value bond with annual coupon payments,a coupon rate of 7 percent,a maturity of 4 years,and a yield to maturity of 8.2 percent.

(Multiple Choice)

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Question 23

Which one of the following is not associated with forward contracts?

(Multiple Choice)

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Question 24

Which one of the following is true about the use of derivatives?

(Multiple Choice)

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Question 25

A mortgage banker has forward contracts to lend $12 million at 4.5 percent for 15 years.What position in Treasury bond futures does this banker need to hedge the interest rate risk?

(Multiple Choice)

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Question 26

Assume a futures contract on gold is based on 100 troy ounces with prices quoted in dollars per troy ounce.Assume one contract called for delivery some time during the month of April.The price of gold opened the month at $1,194.The low quote for April was $1,189,the high was $1,212,and the end of month settle quote was $1,197.By what amount did the value on one contract vary over the month of April?

(Multiple Choice)

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Question 27

Credit default swaps:

(Multiple Choice)

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Question 28

Mortgage bankers earn income principally by:

(Multiple Choice)

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Question 29

A swap is an arrangement for two counterparties to:

(Multiple Choice)

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Question 30

Credit default swaps are most like:

(Multiple Choice)

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Question 31

A 3-month futures contract on gold is priced at $1,200 per troy ounce when the contract is initiated.If the price of gold rises every day over the 3-month period,then when the contract is settled,the buyer will and the seller will .

(Multiple Choice)

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Question 32

Explain why credit default swaps act like an insurance policy.

(Essay)

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Question 33

Identify several of the differences between a forward contract and a futures contract.

(Essay)

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Question 34

Today,you purchased a futures contract obligating you to purchase 100 troy ounces of gold for $1,218 per ounce any time over the next month.Assume the spot price of gold falls to $1,216 tomorrow.What will be your cash flow tomorrow for this contract?

(Multiple Choice)

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Question 35

Caps and floors are used in conjunction with derivatives to:

(Multiple Choice)

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Question 36

Assume a bond matures in 2 years,has a coupon rate of 6 percent,pays interest annually,and has a face value of $1,000.What is the duration of this bond if it is priced at par?

(Multiple Choice)

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Question 37

Assume you write a futures contract on corn at $4.05 per bushel.Over the next 5 trading days the contract settled at $4.07,$4.05,$4.04,$4.02,and $4.04.You then decide to reverse your position in the futures market on the fifth day at close.What is the net amount you receive on this contract per bushel?

(Multiple Choice)

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Question 38

You hold a futures contract to take delivery of U.S.Treasury bonds in 6 months.If the entire term structure of interest rates shifts down over the 6-month period,the value of the forward contract will have ________ the date of delivery.

(Multiple Choice)

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Question 39

Hedging in the futures markets can reduce all risk if:

(Multiple Choice)

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Question 40

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Exam 25: Derivatives and Hedging Risk

In percentage terms,higher coupon bonds experience a ________ price change compared with lower coupon bonds of the same maturity given a stated change in market interest rates.

The futures markets are considered by some to be highly risky and equivalent to gambling.Why is this an inaccurate portrayal of the market's function?

Calculate the duration of a $1,000 face value bond with annual coupon payments,a coupon rate of 7 percent,a maturity of 4 years,and a yield to maturity of 8.2 percent.

Which one of the following is not associated with forward contracts?

Which one of the following is true about the use of derivatives?

A mortgage banker has forward contracts to lend $12 million at 4.5 percent for 15 years.What position in Treasury bond futures does this banker need to hedge the interest rate risk?

Credit default swaps:

Mortgage bankers earn income principally by:

A swap is an arrangement for two counterparties to:

Credit default swaps are most like:

A 3-month futures contract on gold is priced at $1,200 per troy ounce when the contract is initiated.If the price of gold rises every day over the 3-month period,then when the contract is settled,the buyer will ________ and the seller will ________.

Explain why credit default swaps act like an insurance policy.

Identify several of the differences between a forward contract and a futures contract.

Today,you purchased a futures contract obligating you to purchase 100 troy ounces of gold for $1,218 per ounce any time over the next month.Assume the spot price of gold falls to $1,216 tomorrow.What will be your cash flow tomorrow for this contract?

Caps and floors are used in conjunction with derivatives to:

Assume a bond matures in 2 years,has a coupon rate of 6 percent,pays interest annually,and has a face value of $1,000.What is the duration of this bond if it is priced at par?

You hold a futures contract to take delivery of U.S.Treasury bonds in 6 months.If the entire term structure of interest rates shifts down over the 6-month period,the value of the forward contract will have ________ the date of delivery.

Hedging in the futures markets can reduce all risk if:

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A 3-month futures contract on gold is priced at $1,200 per troy ounce when the contract is initiated.If the price of gold rises every day over the 3-month period,then when the contract is settled,the buyer will and the seller will .