Money and Banking Chapter 14
Futures contracts are regularly traded on the
Chicago Board of Trade
When interest rates fall, a bank that perfectly hedges its portfolio of Treasury securities in the futures market
Has no change in its income
A swap that involves the exchange of one set of interestpayments for another set of interest payments is called
Interest rate swap
A contract that requires the investor to buy securities on future date is called a
Long contract
Futures differ from forwards because they are
A standardized contract
Hedging in the futures market
Eliminates both the opportunity for gains and losses
Forward contracts are of limited usefulness to financial institutions because
Of default risk, and of lack of liquidity
The amount paid for an option is the
Premium
If Second National Bank has more rate-sensitive assets than rate-sensitive liabilities, it can reduce interst rate risk with a swap that requires Second National to
Receive fixed rate while paying floating rate.
If you sold a short contract on financial futures you hope interest rates
Rise
If you buy a call option on treasury futures at 115, and at expiration the market price is 110,
The call will not be exercised
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.
A call option gives the seller
The obligation to sell the underlying security
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
The advantages of futures contracts relative to forward contracts is that futures contracts
are standardized, making it easier to match parties, thereby increasing liquidity; Specify that more than one bond is eligible for delivery, making it harder for someone to corner the market and squeeze traders.
The seller of an option has the
obligation to buy or sell the underlying asset
A financial contract that obligated one party to exchange a set of payments it owns for another set of payments owned by another party is called a
swap
A tool for managing interest rate risk that requires exchange of payment streams is a
swap