Deck 18: Managing Financial Risk With Derivatives

Question 1

Based on the Treasury & Risk Management's 2001 Derivatives Survey,the majority of the respondents favored:

A)Interest rate swaps
B)OTC interest rate options
C)OTC foreign exchange options
D)Exchange traded futures or options

Answer 1

A

Question 2

When buying or selling a futures contract,the trader commits what amount of funds?

A)the face value of the futures contract
B)the face value of the futures contract plus a commission
C)the amount of the initial margin
D)the amount of the dealer's spread

Answer 2

C

Question 3

An investor in Treasury bills cannot find a Treasury bill futures contract,which matches his maturity date,and selects a Eurodollar futures contract instead.This is called a

A)direct hedge
B)convoluted hedge
C)hybrid hedge
D)cross hedge

Answer 3

D

Question 4

A perfect hedge is one in which

A)the broker waives the commission
B)the maturity of the futures contract matches the cash market position
C)the gain on the cash position is exactly offset by the loss related to the futures contract
D)none of the above

Question 5

An interest rate collar has a cap strike rate of 10.00% and a floor strike rate of 9.50%.If the reference interest rate moves from 9.50% to 9.75%,what is the effective rate of the collar?

A)9.50%
B)9.625%
C)9.75%
D)9.875%
E)10.00%

Question 6

The financial manager that will have surplus funds to invest in two months,and wants to eliminate the uncertainty of the interest rate at which the funds will be invested,would engage in a

A)buy hedge
B)sell hedge
C)surplus hedge
D)investment hedge

Question 7

A British Pound futures contract is for 62,500 pounds.The futures exchange rate today on the pound is $1.51 and will be $1.55 in 60 days.If you purchase the contract today to hedge a British pound liability due in 60 days,how much would you gain (lose)on the contract?

A)gain $417
B)lose $417
C)gain $2,500
D)lose $2,500

Question 8

With futures contracts,a trader's position is "marked to market" daily.This means that an investor who bought a Treasury bill futures contract will end up with what change in account value if interest rates drop on a given day?

A)none-the difference in value simply accrues until the contract is sold
B)the trader's account will increase in value
C)the trader's account will decrease in value
D)it can not be determined with only this information

Question 9

The three cash flows involved in a currency swap are the initial exchange of principal amounts,the final exchange (or re-exchange)of principal amounts,and

A)the payment of commission to the brokers
B)the payment of a dealer's spread
C)the exchange of interest payments over the course of the borrowings
D)the payment of import or export tariffs

Question 10

Interest rate caps are marketed by:

A)the U.S.treasury
B)financial institutions
C)the Chicago Mercantile Exchange
D)the New York Stock Exchange

Question 11

The primary difference between an entity trying to hedge interest rate risk versus a speculator in that same financial futures contract is that the hedger is

A)trying to protect a present or anticipated cash position
B)trying to profit from interest rate movements
C)trying to guess what the interest rates will be at the expiration of the contract
D)trying to use the contract to avoid taxes

Question 12

A US multinational anticipates a large sale to a British importer.While the price of the goods is set,the importer may choose to purchase them from another source.The terms of sale are net 90.If the British pound is depreciating relative to the dollar,which of the following would be the best way to hedge the transaction risk associated with the depreciating pound?

A)sell a forward contract
B)sell a futures contract
C)purchase a currency put option
D)purchase a currency call option
E)purchase a futures contract

Question 13

A company wishes to hedge a cash position with an interest rate futures contract.To do so effectively,the maturities of the cash and futures instruments should be the same,or

A)the holder of the cash position will not be able to hedge the cash position
B)the normal futures position should be reversed: if a buy hedge would have been used,a sell hedge should be used instead,and vice versa
C)the number of futures contracts can be adjusted to equal the dollar price change per basis point
D)the cash position should be adjusted to match the maturities

Question 14

Key rules forming the backbone of Regulation FAS 133 include:

A)Companies must fully describe their hedging activities
B)The amount by which a hedge is not perfect must be reported on the balance sheet
C)The amount by which a hedge is not perfect must be reported on the income statement
D)'a' and 'c'
E)'a' and 'b'

Question 15

From the corporate financial manager's perspective,the most important difference between a futures option and a futures contract is that

A)the option limits the loss exposure to the option premium
B)commissions on options are lower as a percent of the cash market position being hedged
C)options have no expiration date
D)options are much riskier to use because their daily price changes may be so large

Question 16

If using a Treasury bill futures contract to offset a commercial paper position,the financial manager should ensure that

A)the two vehicles are interchangeable for purposes of delivery at the contract's expiration
B)the movement in Treasury bill rates and commercial paper rates are closely correlated
C)the maturities of the futures contract and commercial paper are different
D)none of the above

Question 17

A futures trader anticipates that interest rates will rise more than what the financial markets expect.He would profit by

A)waiting until the rates rise,then buy a futures contract
B)waiting until the rates rise,then sell a futures contract
C)buy a contract now,and sell it after the rates rise
D)sell a contract now,and buy it back after the rates rise