Deck 30: International Bond Markets

Question 1

Derivative instruments that are used to control interest rate risk include:

A) Interest rate futures.
B) Interest rate options.
C) Interest rate forwards.
D) a and b only.
E) All of the above.

Answer 1

a and b only.

Question 2

Futures contracts whose underlying instrument is a short-term debt obligation include:

A) Treasury bill futures.
B) Eurodollar futures.
C) Treasury bond futures.
D) a and b only.
E) All of the above.

Answer 2

a and b only.

Question 3

The rate paid on Eurodollar CD futures is the:

A) Index price.
B) London Interbank Offered Rate (LIBOR).
C) T-bill rate.
D) Prime rate.
E) Money market rate.

Answer 3

London Interbank Offered Rate (LIBOR).

Question 4

The CBT determines which Treasury issues are acceptable for delivery of a Treasury bond futures contract as long as it meets the following criteria:

A) The issue must be long-term.
B) The issue must have at least 15 years to maturity from the date of delivery if not callable.
C) The issue must be short-term.
D) The issue cannot be callable.
E) None of the above.

Question 5

The option of when in the delivery month of a CBT Treasury bond futures contract to deliver is referred to as:

A) Quality option.
B) Timing option.
C) Wild card option.
D) Swap option.
E) None of the above.

Question 6

A wild card option is:

A) The choice of which acceptable Treasury issue to deliver.
B) The choice of when in the delivery month to deliver.
C) The choice to deliver after the closing price of the futures contract is determined.
D) The choice to deliver the cheapest issue.
E) None of the above.

Question 7

The theoretical futures price depends on which of the following factors?

A) Cash market price.
B) Financing cost.
C) Cash yield on underlying instrument.
D) a and c only.
E) All of the above.

Question 8

If the shape of the yield curve is upward sloping and the cost of carry is positive, the futures price will trade at a:

A) Discount to the cash price.
B) Premium to the cash price.
C) Be equal to the cash price.
D) Cannot be determined.
E) None of the above.

Question 9

The futures price will trade at a premium to the cash price if:

A) The yield curve is normal, and the cost of carry is positive.
B) The yield curve is normal, and the cost of carry is negative.
C) The yield curve is inverted, and the cost of carry is negative.
D) The yield curve is flat, and the cost of carry is zero.
E) None of the above.

Question 10

The shape of the yield curve also influences when the short will choose to deliver. Thus, if the carry is negative, the short will:

A) Delay delivery until the last permissible settlement date.
B) Deliver on the first permissible settlement date.
C) Will not do anything.
D) Will wait until the shape of the yield curve has changed.
E) None of the above.

Question 11

Interest rate futures can be used by market participants to:

A) Allocate funds between stock and bonds.
B) Provide portfolio insurance.
C) Enhance returns when futures are mispriced.
D) Hedge against adverse interest rate movements.
E) All of the above.

Question 12

Speculation in interest rate futures differs from speculating with interest rate options in that interest rate options:

A) Limit downside risk.
B) Reduce the upside potential by the amount of the option price.
C) Offers unlimited gains.
D) a and b only.
E) None of the above.

Question 13

The Black-Scholes model limits the use in pricing options on interest rate instruments as a result of which of the following assumptions?

A) Short-term rates remain constant.
B) Homogeneous investors.
C) Price volatility is constant over the live of the option.
D) a and c only.
E) All of the above.

Question 14

A pension sponsor, who wishes to alter the composition of the pension funds between stocks and bonds, can use:

A) Stock index options.
B) Interest rate options.
C) Treasury bonds.
D) a and b only.
E) All of the above.

Question 15

To alter the beta of a well-diversified stock portfolio, investment managers can use:

A) Stock index futures.
B) Interest rate futures.
C) Treasury bills.
D) Treasury bonds.
E) None of the above.

Question 16

Institutional investors look for the mispricing of stock index futures to create arbitrage profits and thereby enhance portfolio returns. This strategy is referred to as:

A) Dynamic hedging.
B) Index arbitrage.
C) Riskless arbitrage.
D) Program trading.
E) None of the above.

Question 17

Dynamic hedging is an investment strategy, which:

A) Seeks to insure the value of a portfolio through the use of a synthetic put option.
B) Requires rebalancing.
C) Takes advantage of the mispricing of stock index futures.
D) a and b only.
E) All of the above.

Question 18

Futures contracts are products created by exchanges.

Question 19

The Eurodollar CD futures contract is a cash settlement contract.

Question 20

Parties to the futures option will realize a position in a futures contract when the option is exercised.

Question 21

The arbitrage-free option-pricing models can incorporate different volatility assumptions along the yield curve.

Question 22

Explain the delivery options embedded in the Treasury bond and note futures contracts and their impact on the futures price.

Question 23

Describe the mechanics of trading futures options.