Money and Banking Exam

By selling short a futures contract of $100,000 at a price of 115 you are agreeing to deliver

$100,000 face value securities for $115,000

By buying a long $100,000 futures contract for 115 you agree to pay

$115,000 for $100,000 face value bonds

If you sell twenty-five $100,000 futures contracts to hedge holdings of a Treasury security, the value of theTreasury securities you are holding is

$2,500,000

If a bank has more rate-sensitive assets than rate-sensitive liabilities

it reduces interest rate risk by swapping rate-sensitive income for fixed rate income

Hedging by buying an option

limits losses

A contract that requires the investor to buy securities on a future date is called a

long contract

When interest rates are expected to rise on the future a banker is likely to

make short term rather than long term loans

An increase in the volatility of the underlying asset, all other things held constant, will

increase the option premium

The main advantage of using options on futures contracts rather than the futures contracts themselves is that

interest rate risk is controlled while preserving the possibility of gains

To say that the forward market lacks liquidity means that

it may be difficult to make the transaction

Hedging risk for a long position is accomplished by

taking a short position

All other things held constant, premiums on options will increase when the

term to maturity increases

Last year you purchased a bond with an interest rate of 5 percent. nOw the interest rate on the bond market drops to 4 percent

that means you will receive the same amount of coupons payments from the issuer while you are holding the bond and you can sell your bond at todays markets for a higher price

The advantage of forward contracts over futures contracts is that they

are more flexible

When interest rates fall, a bank that perfectly hedges its portfolio of Treasury securities in the futures market

has no change in its income

Futures differ from forwards because they are

a standardized contract

Bruce the Bank Manager can reduce interest rate risk by shortening the duration of the bank's assets to increase their rate sensitivity or

alternatively lengthening the duration of the bank's liabilities.

In the long run what cause depreciation of domestic currency is

an increase in domestic price level and an increase in imports demand

The advantage of futures contracts relative to forward contracts is that futures contracts

are standardized, making it easier to match parties, thereby increasing liquidity and specify that more than one bond is eligible for delivery, making it harder for someone to corner the marketand squeeze traders

If a bank manager wants to protect the bank against losses that would be incurred on its portfolio of treasury securities should interest rates rise, he could

buy put options on financial futures

If a firm must pay for goods it has ordered with foreign currency, it can hedge its foreign exchange rate risk by

buying foreign exchange futures long

An increase in domestic price level and an increase in imports demand

cause the public to expect a depreciation of domestic currency

Hedging in the futures market

eliminates the opportunity for gains and eliminates the opportunity for losses

All other things held constant, premiums on call options will increase when the

exercise price falls

If a bank manager chooses to hedge his portfolio of treasury securities by selling futures contracts, he

gives up the opportunity for gains and removes the chance of loss

Forward contracts are of limited usefulness to financial institutions because

of default risk and of lack of liquidity

Options are contracts that give the purchasers the

option to buy or sell an underlying asset

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

pay fixed rate while receiving floating rate

An option that gives the owner the right to sell a financial instrument at the exercise price within a specified period of time is a

put option

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

receive fixed rate while paying floating rate

If a firm is due to be paid in deutsche marks in two months, to hedge against exchange rate risk the firm should

sell foreign exchange futures short

A short contract requires that the investor

sell securities in the future.

Parties who have bought a futures contract and thereby agreed to buy

the bonds are said to have taken a long position

Assume you are holding Treasury securities and have sold futures to hedge against interest rate risk. If interest rates rise

the decrease in the value of the securities equals the increase in the value of the futures contracts

Assume you are holding Treasury securities and have sold futures to hedge against interest-rate risk. If interest rates fall

the increase in the value of the securities equals the decrease in the value of the futures contracts

The seller of an option has the

the obligation to buy or sell the underlying asset

A call option gives the seller

the obligation to sell the underlying security

When the exchange rate for the British pound changes from 1.80 per pound to 1.60 per pound then holding everything else constant

the pound has depreciated , American wheat sold in Britain becomes more expensive and British cars sold in the U.S become less expensive

If you buy a put option on treasury futures at 110, and at expiration the market price is 115

the put will not be exercised

A put option gives the owner

the right to sell the underlying security

When a central bank increases the nominal interest rate but the real interest rate remains the same, it gives a signal to the public that the inflation rate is expected to increase

therefore people expect the value of the domestic currency to decrease as results based on the interest parity condition the domestic currency depreciates

A disadvantage of a forward contract is that

these contracts have default risk, the forward market suffers from lack of liquidity, it may be difficult to locate a counterparty

The main reason to buy an option on a futures contract rather than the futures contract is

to limit losses and preserve the possibility of gains

If you sold a short contract on financial futures you hope interest rates

wil rise

If you sold a short futures contract you will hope that bond prices

will fall

If you bought a long futures contract you hope that bond prices

will rise

If you sell a $100,000 interest-rate futures contract for 105, and the price of the Treasury securities on the expiration date is 108

your loss is $3000

If you purchase a $100,000 interest-rate futures contract for 110, and the price of the Treasury securities on the expiration date is 106

your loss is $4000

If, for a $1000 premium, you buy a $100,000 call option on bond futures with a strike price of 110, and at the expiration date the price is 114

your profit is $3000

If, for a $1000 premium, you buy a $100,000 put option on bond futures with a strike price of 114, and at the expiration date the price is 110

your profit is $3000