fin 475 ch 8

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An investor purchases one September T-bond futures contract at 115-110. The settlement price for the contract on next day is 117-225. What is the marked-to-market gain/loss for the investor? A. $2,359.38 B. -$2,539.38 C. $2.36 D. -$2,115 E. $2.115

A. $2,359.38

Suppose a Eurodollar time deposit futures contract whose underlying's duration is 0.5 years and has a current market price of $950,000. Market interest rates are 8.5 percent and are expected to fall to 7.5 percent. What is the expected change in this futures contract's market price as a result of this change in interest rates? A. $4,378 B. -$4,378 C. $30,645 D. -$30,645 E. None of the options are correct

A. $4,378

A Treasury Bond futures contract is selling in the market for $98,225 and has a duration of 8 years. The same Treasury Bond is selling in the cash market for $98,625 and has a duration of 8.25 years. What is the basis for this futures contract? A. $400 B. 0.25 years C. $28,156.25 D. $1,600 E. None of the options are correct

A. $400

Zenith Company has borrowed $1 million from Strong Capital Bank at an interest rate of LIBOR plus 2 percent. However, the CFO of Zenith fears that the short-term interest rates may rise in the near future and purchases an interest-rate cap of 5 percent from Strong Capital Bank. What will be the annual interest outflow for Zenith, if the LIBOR rate rises to 3.5 percent? A. $50,000 B. $45,000 C. $55,000 D.$5,000 E. Zero

A. $50,000

The American Commerce Bank (ACB) lends $1.5 million to Unity International Company for six months. The bank usually changes a rate of LIBOR plus 3 percent to companies with similar credit ratings. However, since the bank's economists are of the view that short-term interest rates may fall in the near future, ACB decided to lend money to Unity at a discounted rate of LIBOR plus 2 percent in return for an interest-rate floor of 4.5 percent. What amount of interest rebate will the bank receive, if LIBOR drops to 1.5 percent from 2.5 percent immediately after lending the amount? A. $7,500 B. $20,000 C. $22,500 D. $17,500 E. Zero

A. $7,500

The September T-bond futures contract is currently selling at 111-05 and September call option on T-bond futures for a strike price of 115-00 is currently quoting at 2-24. If an investor purchases one contract of the call option at the current market price and if the T-bond futures contract settles at 118-05 on the expiration day, what will be the net gain/loss for the investor? A. $781.25 B. $281.25 C. -$359.38 D. $791.25 E. $566.25

A. $781.25

The approximate percentage of banks operating in the U.S. who reportedly use derivative contracts for risk reduction is: A. 15%. B. 25%. C. 50%. D. 75%. E. 100%.

A. 15%.

Suppose a bank has an asset duration of 5 years and a liability duration of 2.5 years. The bank has $1,000 million in assets and $750 million in liabilities. It is planning to trade in Treasury bond futures whose underlying's duration is 8.5 years and is currently selling at $99,000 for a $100,000 contract. How many futures contracts does the bank need to fully hedge itself against interest rate risk? A. 3,714 contracts B. 3,125 contracts C. 2,971 contracts D. 371 contracts E. None of the options are correct

A. 3,714 contracts

A futures contract on a 30-day Eurodollar time deposit is currently selling at an IMM index of 95.75 percent. The IMM index on a 30-day Eurodollar time deposit for immediate delivery is 95.10 percent. What is the basis? A. 65 basis points B. -65 basis points C. 650 basis points D. 850 basis points E. There is no basis risk on this contract

A. 65 basis points

What is the objective of a fair value hedge? A. To offset the losses due to changes in the value of an asset or liability B. To reduce the risk associated with future cash flows C. To predict future cash flows D. To predict the value of an asset or minimize the value of a liability E. None of the options are correct

A. To offset the losses due to changes in the value of an asset or liability

A futures contract which calls for the delivery of a $100,000 T-bond with a minimum of 15 years to maturity is called a: A. U.S. Treasury bond futures contract. B. One-month LIBOR futures contract. C. Eurodollar time deposit futures contract. D. Federal Funds futures contract. E. None of the options are correct.

A. U.S. Treasury bond futures contract.

A bank wishing to avoid higher borrowing costs is most likely to use: A. a short position or selling hedge in futures. B. a long position or buying hedge in futures. C. a long position in call option on futures contracts. D. a long position or buying hedge in futures and a long position in call option on futures contracts. E. None of the options are correct.

A. a short position or selling hedge in futures.

Eurodollar contracts are quoted using: A. an index price which is 100 minus the yield on a bank discount basis. B. an index price which is 100 minus the yield on a ten-year U.S. treasuries. C. interest rate derived from one-month federal funds futures. D. interest rate derived from three-month U.S. T-bill futures. E. interest rate derived from one-year U.S. T-bond futures.

A. an index price which is 100 minus the yield on a bank discount basis.

Large depository institutions tend to act: A. both as dealers and end users. B. only as dealers. C. only as end users. D. neither as dealers nor end users. E. largely as speculators.

A. both as dealers and end users.

Interest rate swaps: A. can change exposure to interest-rate fluctuations. B. are one of the oldest interest rate hedging devices. C. allows for the exchange of amounts in different currencies by two parties. D. are rigid and inflexible. E. None of the options are correct.

A. can change exposure to interest-rate fluctuations.

An interest rate collar: A. combines a rate floor and a rate cap into one agreement. B. ranges in maturity from a few days to a few weeks. C. protects a lender from rising interest rates. D. All of the options are correct. E. ranges in maturity from a few days to a few weeks and protects the lender from rising interest rates.

A. combines a rate floor and a rate cap into one agreement.

A buyer of a put option on fixed-income securities is most likely to: A. exercise the option if interest rates rise. B. let the option expire if the interest rates rise. C. exercise the option if interest rates fall. D. exercise the option if interest rates remain constant. E. buy a call option also on the same securities.

A. exercise the option if interest rates rise.

A bank that buys a call option: A. has the right to accept delivery of the underlying security at the contract price if they wish. B. has the right to make delivery of the underlying security at the contract price if they wish. C. is obligated to accept delivery of the underlying security at the contract price. D. is obligated to make delivery of the underlying security at the contract price. E. is exposed to unlimited losses and limited gains.

A. has the right to accept delivery of the underlying security at the contract price if they wish.

When an investor first purchases or sells a futures contract, she must make a deposit to the exchange. This is called the: A. initial margin. B. variation margin. C. premium. D. open interest. E. margin call.

A. initial margin.

Suppose a $100,000 T-Bond futures contract whose underlying's duration is 9 years and has a current market price of $98,750. Market interest rates are 6 percent today but are expected to rise to 7.5 percent. What is the expected change in this futures contract's market price as a result of this change in interest rates? A. $12,577 B. -$12,577 C. $62,883 D. -$62,883 E. None of the options are correct

B. -$12,577

The Kromwell Community Bank's asset portfolio has an average duration of 6 years and its liability portfolio has an average duration of 2.5 years. The bank has $500 million in total assets and $450 million in liabilities. The Kromwell Community Bank is thinking about hedging its risk by using a Treasury Bond futures contract whose underlying's duration is 7.5 years and has a price of $98,000. How many futures contracts will it need to hedge its risk? A. 2,381 contracts B. 2,551 contracts C. 3,061 contracts D. 4,464 contracts E. 5,221 contracts

B. 2,551 contracts

A bank with a leverage-adjusted duration gap of 2 years and total assets of $100 million uses a futures contract whose underlying's duration is 5 years and has a price of $100,000 to hedge its exposure. The number of contracts needed is: A. 2,000 B. 4,000 C. 8,000 D. 10,000 E. 20,000

B. 4,000

According to the textbook, the most actively traded futures contract in the world is: A. Federal Funds futures contracts. B. Eurodollar time deposit futures contracts. C. U.S. Treasury bond futures contract. D. U.S. Treasury bills futures contract. E. U.S. Treasury notes futures contract.

B. Eurodollar time deposit futures contracts.

What is the objective of a cash flow hedge? A. To offset the losses due to changes in the value of an asset or liability B. To reduce the risk associated with future cash flows C. To predict future cash flows D. To predict the value of an asset or minimize the value of a liability E. None of the options are correct

B. To reduce the risk associated with future cash flows

A swap where the notional amount is constant is called: A. a quality swap B. a bullet swap C. an amortizing swap D. an accruing swap E. None of the options are correct

B. a bullet swap

A bank seeking to avoid lower than expected yields from loans and security investments is most likely to use: A. a short position or selling hedge in futures. B. a long position or buying hedge in futures. C. a long position in put option on futures contracts. D. a long position or buying hedge in futures and a long position in put option on futures contracts. E. None of the options are correct.

B. a long position or buying hedge in futures.

A financial institution that sells a particular futures contract and later purchases the same contract back is executing: A. a long hedge. B. a short hedge. C. a sideways hedge. D. an up-side-down hedge. E. None of the options are correct

B. a short hedge.

A significant limitation to financial futures as an interest-rate hedging device is a special form of risk known as ___________ risk. Which of the following terms correctly completes the statement? A. default B. basis C. credit D. market E. None of the options are correct

B. basis

The floating-rate payer in a swap would most likely want to buy an interest-rate: A. floor. B. cap. C. collar. D. deposit contract. E. futures contract.

B. cap.

The person who executes orders in the futures market for the public is called a: A. day trader. B. floor broker. C. clearing member. D. speculator. E. scalper.

B. floor broker.

A financial institution that buys a put option: A. has the right to accept delivery of the underlying security at the contract price if they wish. B. has the right to make delivery of the underlying security at the contract price if they wish. C. is obligated to accept delivery of the underlying security at the contract price. D. is obligated to make delivery of the underlying security at the contract price. E. is exposed to unlimited losses and limited gains.

B. has the right to make delivery of the underlying security at the contract price if they wish.

The daily settlement process that credits gains or deducts losses from a futures customer's account is called: A. factoring. B. marking-to-market. C. margining. D. maintenance. E. realizing.

B. marking-to-market.

Interest rate caps: A. first developed in the 1980s. B. protect the borrower from rising interest rates. C. allow for the exchange of amounts in different currencies by two parties. D.protect the lenders from falling interest rates. E. allow for the exchange of amounts in different currencies by two parties and protect the lenders from falling interest rates.

B. protect the borrower from rising interest rates.

Assume that two firms, one considered a high credit risk (HCR) and the other a low credit risk (LCR), are considering an interest rate swap. Each can borrow at the following rates: An interest rate swap would be beneficial to both parties if: A. the LCR firm wants to borrow at the fixed rate and the HCR firm wants to borrow at the variable rate. B. the HCR firm wants to borrow at the fixed rate and the LCR firm wants to borrow at the variable rate. C. both firms want to borrow at the variable rate. D. both firms want to borrow at the fixed rate. E. an interest rate swap would be never beneficial in this situation.

B. the HCR firm wants to borrow at the fixed rate and the LCR firm wants to borrow at the variable rate.

Julie Wells has found a Treasury Bond futures contract whose underlying's duration is 8.5 years and is currently selling for $97,500. Interest rates are currently 8% and are expected to rise by 1.5%. What is the expected change in the future contract's price for this change in interest rates? A. $1,462.50 B. $12,431.25 C. -$11,510.42 D. -$1,462.50 E. -$12,431.25

C. -$11,510.42

Which of the following is an advantage of an interest rate swap agreement? A. Little or no basis risk B. Low brokerage fees C. Increased flexibility as compared to other hedging techniques D. Little or no credit risk E. All of the options are advantages of interest rate swap agreements.

C. Increased flexibility as compared to other hedging techniques

Which of the following is a characteristic of a swap buyer? A. Prefers floating rate loans B. Generally has a higher credit rating C. Often has a positive duration gap D. Generally has a large holding of short-term assets E. All of the options are correct

C. Often has a positive duration gap

The part of an agreement which allows one or both parties to make certain changes to the agreement or eliminate the agreement is called: A. an interest rate swap. B. a currency swap. C. a swaption. D. a quality swap. E. None of the options are correct

C. a swaption.

A swap where the notional amount declines over time is called: A. a quality swap B. a bullet swap C. an amortizing swap D. an accruing swap E. None of the options are correct

C. an amortizing swap

A buyer of a call option on fixed-income securities is most likely to: A. exercise the option if interest rates rise. B. let the option expire if the interest rates fall. C. exercise the option if interest rates fall. D. exercise the option if interest rates remain constant. E. buy a put option also on the same securities.

C. exercise the option if interest rates fall.

A financial institution that goes long in the futures market: A. has the right to accept delivery of the underlying security at the contract price if they wish. B. has the right to make delivery of the underlying security at the contract price if they wish. C. is obligated to accept delivery of the underlying security at the contract price. D. is obligated to make delivery of the underlying security at the contract price. E. is exposed to limited losses and unlimited gains.

C. is obligated to accept delivery of the underlying security at the contract price.

The amount that is used to determine the mark-to-market for a futures contract at the end of each day is called the: A. open price. B. high price. C. settlement price. D. low price. E. day average.

C. settlement price.

A financial institution that uses a long hedge is most likely: A. trying to avoid higher borrowing costs. B. trying to avoid declining asset values. C. trying to avoid lower than expected yields from loans and securities. D. trying to avoid higher borrowing costs or trying to avoid declining asset values. E. trying to offset a positive duration gap.

C. trying to avoid lower than expected yields from loans and securities.

A bank wishes to sell $350 million in new 30-day time deposits next month. Today interest rates are 7 percent. However, in the next month interest rates are expected to rise to 7.75 percent. What is the potential loss in profit for the month from this increase in interest rates? (Use a 360 day year) A. $27.125 million B. $24.500 million C.$0.21875 million D. $2.625 million E. There is no potential loss from this increase

C.$0.21875 million

The 30-day Federal funds futures contracts are traded in the units of: A. $100,000 B. $1,000,000 C. $3,000,000 D. $5,000,000 E. $500,000

D. $5,000,000

A financial institution with a negative gap can reduce the risk of loss due to changing interest rates by: A. extending asset maturities. B. increasing short-term interest-sensitive liabilities. C. using financial futures or options contracts. D. All of the options are correct E. None of the options are correct

D. All of the options are correct

The number of futures contracts that a bank will need in order to fully hedge its overall interest rate risk exposure and protect the net worth depends upon (among other factors): A. the relative duration of bank assets and liabilities. B. the duration of the underlying security named in the futures contract. C. the price of the futures contract. D. All of the options are correct E. None of the options are correct

D. All of the options are correct

The realized return to a bank from a combined cash and futures market trading operation is composed of which of the following elements? A. Returns earned in the cash market B. Profit or loss from futures trading C. Difference between the opening and closing basis between cash and futures markets D. All of the options are correct E. Profit or loss from futures trading and the difference between the opening and closing basis between cash and futures markets

D. All of the options are correct

An option buyer can: A. exercise the option. B. sell the option to another buyer. C. allow the option to expire. D. All of the options are correct. E. exercise the option or must sell it to another buyer.

D. All of the options are correct.

143. ________ in a swap refers to the risk arising from the difference in the interest rate defined in the terms of a swap and the interest rates of the assets and liabilities held by the parties to swap. A. Default risk B. Liquidity risk C. Interest rate risk D. Basis risk E. Transaction risk

D. Basis risk

The underlying on the Eurodollar futures contract is the: A. U.S. dollar. B. Euro. C. U.S. T-bills. D. Eurodollar CD paying three-month LIBOR rate. E. 10-year U.S. treasuries.

D. Eurodollar CD paying three-month LIBOR rate.

Which of the following tends to accurately predict the consensus opinion as to actions expected to be taken by the Federal Open Market Committee in the future? A. U.S. Treasury bond futures contract B. Eurodollar time deposit futures contract C. One month LIBOR futures contract D. Federal Funds futures contract E. All of the options are correct

D. Federal Funds futures contract

Which of the following is a characteristic of a swap seller? A. Prefers fixed-rate loans B. Generally has a lower credit rating C. Often has a positive duration gap D. Generally has a large holding of short-term assets E. All of the options are correct

D. Generally has a large holding of short-term assets

An agreement where a party with a lower credit rating enters into an agreement to exchange interest payments with a borrower having a higher credit rating is known as: A. an interest rate swap. B. a currency swap. C. a swaption. D. a quality swap. E. None of the options are correct

D. a quality swap.

132. A swap where the notional amount accumulates over time is called: A. a quality swap B. a bullet swap C. an amortizing swap D. an accruing swap E. None of the options are correct

D. an accruing swap

A bank that goes short in the futures market: A. has the right to accept delivery of the underlying security at the contract price if they wish. B. has the right to make delivery of the underlying security at the contract price if they wish. C. is obligated to accept delivery of the underlying security at the contract price. D. is obligated to make delivery of the underlying security at the contract price. E. is exposed to limited losses and unlimited gains.

D. is obligated to make delivery of the underlying security at the contract price.

If a financial institution agrees to guarantee a swap agreement negotiated between two of its customers, usually: A. it will mark the transaction as a deferred asset. B. it will mark the transaction as a deferred liability. C. it will mark the transaction as a contingent asset. D. it will mark the transaction as a contingent liability. E. it does not record the transaction in its books.

D. it will mark the transaction as a contingent liability.

A call option on Eurodollar deposit futures is most likely to be used by a bank to: A. protect the value of its fixed-rate loans and securities. B. offset a negative interest-sensitive gap. C. offset a positive duration gap. D. offset a negative duration gap. E. speculate on the rising interest rates.

D. offset a negative duration gap.

A put option on Eurodollar deposit futures is most likely to be used by a bank to: A. reduce its interest sensitive liabilities. B. protect variable-rate loans and securities. C. offset a positive interest-sensitive gap. D. offset a negative interest-sensitive gap. E. None of the options are correct.

D. offset a negative interest-sensitive gap.

The number of contracts that have been established and not yet offset or exercised is called __________________. A. trade contracts B. unexpired contracts C. accumulated contracts D. open interest E. uncleared contracts

D. open interest

A bank that uses a short hedge is most likely: A. trying to avoid higher borrowing costs. B. trying to avoid declining asset values. C. trying to avoid lower than expected yields from loans and securities. D. trying to avoid higher borrowing costs or trying to avoid declining asset values. E. trying to offset a negative duration gap.

D. trying to avoid higher borrowing costs or trying to avoid declining asset values.

The gain or loss to a bank from the use of a financial futures contract depends upon: A. the duration of the underlying security named in the futures contract. B. the initial futures price. C. the change expected in interest rates. D.All of the options are correct. E. None of the options are correct.

D.All of the options are correct.

An advantage of interest rate swap is that: A. it can help protect from interest rate fluctuations. B. it can help achieve lower borrowing costs. C. it can help closely match the maturities of assets and liabilities. D. it can help transform actual cash flows to more closely match desired cash flow patterns. E. All of the options are correct

E. All of the options are correct

Interest rate hedging devices used by banks today include which of the following? A. Financial futures contracts. B. Interest-rate options contracts. C. Interest rate swaps. D. Interest rate caps, floors, and collars. E. All of the options are correct

E. All of the options are correct

Which of the following is a characteristic of a swap buyer? A. They generally have a lower credit rating B. They prefer fixed rate longer term loans C. They often have a positive duration gap D. They generally have substantial holdings of longer term assets E. All of the options are correct

E. All of the options are correct

Which of the following is a characteristic of a swap seller? A. They generally have a higher credit rating B. They prefer flexible short-term interest rate C. They often have a negative duration gap D. They generally have large holdings of short-term assets E. All of the options are correct

E. All of the options are correct

Which of the following is one of the risks the OCC requires banks to measure and set limits on? A. Strategic risk B. Reputation risk C. Price risk D. Liquidity risk E. All of the options are correct

E. All of the options are correct

Which of the following is a disadvantage of an interest rate swap agreement? A. Basis risk B. High brokerage fees C.Default risk D. Interest rate risk E. All of the options are disadvantages of interest rate swap agreements.

E. All of the options are disadvantages of interest rate swap agreements.

Which of the following is true with respect to the difference between futures and forward contracts? A. Futures contracts are marked-to-market daily, while forward contracts are not B. Buyers and sellers deal directly with each other on forward contracts but go through organized exchanges in futures contracts C. Futures contracts are standardized, forward contracts generally are not D. Forward contracts are generally more risky because no exchange guarantees the settlement of each contract if one or the other party to the contract defaults E. All of the options describe differences between futures and forward contracts

E. All of the options describe differences between futures and forward contracts

All of the following interest-rate futures contracts are traded on exchanges, except: A. Eurodollar futures contract. B. Treasury bond futures contract. C. Eurodollar time deposit futures contract. D. Federal funds futures contract. E. Corporate bond futures contract.

E. Corporate bond futures contract.

Which of the following is an advantage of trading financial futures to hedge interest-rate risk? A. Only a fraction of the value of the contract must be pledged as collateral B. Brokers' commissions are relatively low C. There is no market risk in trading futures contracts D. All of the options are correct E. Only a fraction of the value of the contract must be pledged as collateral and brokers' commissions are relatively low

E. Only a fraction of the value of the contract must be pledged as collateral and brokers' commissions are relatively low

If a bank has a positive gap, that is, if it is asset sensitive, the bank can hedge its interest-rate risk by which of the following activities? A. Reducing maturities of its assets B. Reducing maturities of its liabilities C. Using a long hedge D. All of the options are correct E. Reducing maturities of its assets and liabilities

E. Reducing maturities of its assets and liabilities

Current selling price on a futures contract reflects what investors in the market expect cash prices to be: A. at the end of the day. B. at the end of the week. C. at the end of the month. D. at the end of the year. E. at the time of delivery.

E. at the time of delivery.

The amount of initial margin, the settlement price, and other rules regarding trading futures contracts are determined by the: A. SEC. B. floor brokers. C. dealers. D.open interest. E. clearinghouse.

E. clearinghouse.


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