Question 1

The Chicago Board of Trade opened active trading in futures contracts in October 1975, but the only type of contracts to be traded at that time were:

Accepted Answer

GNMA mortgage-backed certificates were the only type of contracts to be traded at that time.

Question 2

The basic trading unit for Treasury bonds is:

Accepted Answer

The answer of The basic trading unit for Treasury bonds...

Question 3

In order to buy an option, one must pay the writer a:

Accepted Answer

To buy an option, the buyer must pay the writer a premium. This is the price of obtaining the option itself, separate from the strike price, which is the price at which the buyer can later choose to buy or sell the underlying asset.

Question 4

Which of the following is a true statement?

Accepted Answer

All the statements provided are true regarding their respective hedging strategies. A long hedge involves buying futures to protect against price increases in the future. A long hedge can indeed be used to lock in yields or prices. A short hedge involves selling futures to protect against price decreases. A cross hedge involves hedging a position with a futures contract in a different but related asset, which can involve different securities in the spot and futures markets.

Question 5

The principal amount or unit for the Federal funds futures contract traded on the Chicago Board of Trade is:

Accepted Answer

The principal amount or unit for the Federal funds futures contract traded on the Chicago Board of Trade is $5 million.

Question 6

The term of the Federal funds futures contract traded at the Chicago Board of Trade is:

Accepted Answer

The Federal funds futures contract traded at the Chicago Board of Trade has a term of 30 days.

Question 7

The old line British investment bank and security dealer that collapsed in 1995 due to massive losses in trading derivatives was:

Accepted Answer

Barings Brothers, a prestigious British investment bank, collapsed in 1995 due to unauthorized speculative trading in derivatives by one of its employees, Nick Leeson, in its Singapore office. This led to massive losses that the bank could not absorb, resulting in its bankruptcy.

Question 8

Beginning after December 1998, a new FASB rule relating to reporting about derivatives came into existence. The rule's primary requirement compels firms to:

Accepted Answer

The answer of Beginning after December 1998, a new FASB...

Question 9

Misuse of derivative contracts caused the failure of Barings bank and the near-collapse of Long-Term Capital Management. As a result of these (and other) examples, the following things have happened:

Accepted Answer

Creditors and counterparties have indeed intensified their oversight and risk analysis of derivatives activities within their financial institutions following high-profile failures like Barings Bank and Long-Term Capital Management. This is a direct response to the risks posed by derivatives trading that were highlighted by these incidents.

Question 10

Derivatives continue to gain popularity, with the outstanding value in 2006 at more than

Accepted Answer

In 2006, the outstanding value of derivatives was estimated to be more than $280 trillion.

Question 11

When cash and futures prices or interest rates move parallel

Accepted Answer

When cash and futures prices or interest rates move in parallel, the basis (the difference between cash and futures prices) remains constant, resulting in zero basis risk.

Question 12

Suppose you could forecast interest rates correctly on a consistent basis. What advantages would this give to you?

Accepted Answer

The answer of Suppose you could forecast interest rates correctly...

Question 13

Explain the meaning of the following terms:

Accepted Answer

The answer of Explain the meaning of the following terms:...

Question 14

Please explain the meaning of the term consensus forecast.

Accepted Answer

The answer of Please explain the meaning of the term...

Question 15

What is interest-rate hedging? What is its goal?

Accepted Answer

The answer of What is interest-rate hedging? What is its...

Question 16

What are interest-rate swaps? Why were these instruments developed?

Accepted Answer

The answer of What are interest-rate swaps? Why were these...

Question 17

What risks are associated with swap contracts? Can any of these risks be reduced?

Accepted Answer

The answer of What risks are associated with swap contracts?...

Question 18

When is a partner to a swap in a long position? A short position? To what kinds of risk is each exposed to?

Accepted Answer

The answer of When is a partner to a swap...

Question 19

What is the basic purpose of futures and options trading in securities? Where is most futures and options trading carried out?

Accepted Answer

The answer of What is the basic purpose of futures...

Question 20

How do the spot (cash) markets differ from futures (forward) markets?

Accepted Answer

The answer of How do the spot (cash) markets differ...

Quiz 9: Interest-Rate Forecasting and Hedging: Swaps, Financial Futures, and Options