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