Exam 24: Hedging With Financial Derivatives

When a financial institution hedges the interest-rate risk for a specific asset, the hedge is called a ________.

If you sell a futures contract on the S&P 500 Index at a price of 450 and the index rises to 500, you will ________.

Discuss the advantages of using swaps to protect against interest-rate risk rather than restructuring the balance sheet.

If you buy an option to sell Treasury futures at 110, and at expiration the market price is 115,

Explain the advantages of protecting against interest-rate risk using options rather than futures contracts.

The biggest danger of financial derivatives occurs

A swap that involves the exchange of one set of interest payments for another set of interest payments is called a(n)________.

A valid concern about financial derivatives is that

If you sell a short contract on financial futures, you hope interest rates will ________.

Futures contracts are subject to default risk.

A contract that requires the investor to sell securities on a future date is called a ________.

A put option gives the seller the ________ to ________ the underlying security.

One problem with a futures contract is finding a counterparty.

A financial contract that obligates one party to exchange a set of payments it owns for another set of payments owned by another party is called a ________.

A short contract obligates the holder to sell securities in the future.

Intermediaries add value to the swap markets by reducing default risk.

If Second National Bank has more rate-sensitive liabilities than rate-sensitive assets, it can reduce interest-rate risk with a swap which requires Second National to

Option premiums increase as the term to maturity increases.

The elimination of riskless profit opportunities in the futures market is referred to as ________.

A long contract requires that the investor