Question 1

The average duration of the loans is 10 years. The average duration of the deposits is 3 years.  What is the number of T-Bill futures contracts necessary to hedge the balance sheet if the duration of the deliverable T-bills is 0.25 years and the current price of the futures contract is $98 per $100 face value?

Accepted Answer

The answer of The average duration of the loans is...

Question 2

Use the following two choices to identify whether each intermediary or entity is a net buyer or net seller of credit derivative securities.
-Hedge funds

Accepted Answer

The answer of Use the following two choices to identify...

Question 3

Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. How can the portfolio manager use futures markets to protect against the risk exposure of rising interest rates?

Accepted Answer

By selling interest rate futures, the portfolio manager can lock in a price for the Treasury bonds in the future, which would offset any losses caused by rising interest rates. With a short position in interest rate futures, the portfolio manager would profit if interest rates go up, helping to offset any losses on the Treasury bonds. Therefore, D is the best choice. A, B, C, and E are not relevant to protect against the risk exposure of rising interest rates.

Question 4

The average duration of the loans is 10 years. The average duration of the deposits is 3 years.  What is the number of T-bond futures contracts necessary to hedge the balance sheet if the duration of the deliverable bonds is 9 years and the current price of the futures contract is $96 per $100 face value?

Accepted Answer

The answer of The average duration of the loans is...

Question 5

Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. If Treasury bond futures prices are currently 89-00/32^nds, what is the value of the Treasury bond futures hedge position?

Accepted Answer

To calculate the value of the Treasury bond futures hedge position, we need to calculate the number of contracts needed to hedge the $30 million book value of Treasury bonds.

To do this, we divide the book value by the contract size of the Treasury bond futures, which is $100,000.

30,000,000 / 100,000 = 300 contracts

Now we can calculate the value of the hedge position:

300 contracts x (89-00/32) x $100,000 = $26,700,000

Therefore, the correct answer is choice C.

Question 6

Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. The portfolio manager for Conyers Bank wishes to sell the entire issue of Treasury bonds at a current price of 87-05/32^nds. What will be the gain or loss on the cash position since the futures contract was placed? (That is, since the bonds were valued at $28,387,500.)

Accepted Answer

To determine the gain or loss on the cash position, we need to calculate the new value of the Treasury bonds after selling them at the current price of 87-05/32.

The current price of the Treasury bonds can be converted to a decimal by adding the points to the whole number and dividing by 32.

87-05/32 = 87 + 5/32 = 87.15625

The new value of the Treasury bonds would be:

$30 million * 87.15625% = $26,146,875

The loss on the cash position would be:

$28,387,500 - $26,146,875 = $2,240,625

Therefore, the best choice is E: Loss of $2,240,625.

Question 7

Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. The bank's portfolio manager wants to shorten asset maturities. Which of the following statements is true?

Accepted Answer

The fact that the Treasury bonds are currently worth less than their book value implies that the bank will have to take a loss if they sell the bonds outright. Therefore, the portfolio manager would be reluctant to sell the bonds and would instead look for other ways to shorten maturities.

Question 8

Use the following two choices to identify whether each intermediary or entity is a net buyer or net seller of credit derivative securities.
-Securities firms

Accepted Answer

Securities firms are typically net buyers of credit derivative securities as they act as intermediaries between buyers and sellers and earn commissions on each transaction.

Question 9

Use the following two choices to identify whether each intermediary or entity is a net buyer or net seller of credit derivative securities.
-Mutual funds

Accepted Answer

The answer of Use the following two choices to identify...

Question 10

The average duration of the loans is 10 years. The average duration of the deposits is 3 years.  What is the leveraged-adjusted duration gap of the bank's portfolio?

Accepted Answer

The leveraged-adjusted duration gap formula is as follows:

Leveraged-adjusted duration gap = duration of assets - (assets / liabilities) x duration of liabilities

Using the formula and the given information, we can calculate the leveraged-adjusted duration gap:

Duration of assets = 10 years
Duration of liabilities = 3 years
Assets / Liabilities = 1 (assuming all deposits are used to fund loans)

Leveraged-adjusted duration gap = 10 - (1 x 10/3) = 7.18 years

Therefore, the best choice is D) 7.18 years, as it is the calculated leveraged-adjusted duration gap of the bank's portfolio.

Question 11

Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. Assume that the portfolio manager sells the bonds at a price of87-05/32, and that she closes out the futures hedge position at a price of81-17/32. What will be the net gain or loss on the entire bond transaction from the time that the hedge was placed?

Accepted Answer

The answer of Conyers Bank holds Treasury bonds with a...

Question 12

Use the following two choices to identify whether each intermediary or entity is a net buyer or net seller of credit derivative securities.
-Banks

Accepted Answer

Banks are typically net buyers of credit derivative securities as they use these instruments to manage credit risk in their portfolios.

Question 13

Use the following two choices to identify whether each intermediary or entity is a net buyer or net seller of credit derivative securities.
-Corporations

Accepted Answer

Corporations are typically net buyers of credit derivative securities, as they use them to manage and hedge against credit risk associated with their own businesses.

Question 14

The uniform guidelines issued by bank regulators for trading in futures and forwards

Accepted Answer

The uniform guidelines issued by bank regulators for trading in futures and forwards require a bank to establish trading limits and disclose large contract positions, as well as establish internal guidelines regarding hedging activities. Therefore, option D is the correct answer as it includes all of these requirements.

Question 15

Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. If the portfolio manager put on the hedge when T-bond futures were quoted at 89-00/32^nds, what is the profit/loss on the futures position if the settlement price is 81-27/32^nds?

Accepted Answer

The profit on the futures position is calculated by the change in the futures price. The initial price is 89-00/32nds, which is 89. The settlement price is 81-27/32nds, which is 81.84375. The change in price is 89 - 81.84375 = 7.15625. Each point is worth $1,000, so the profit is 7.15625 * $1,000 * 30 = $2,146,875.

Question 16

Use the following two choices to identify whether each intermediary or entity is a net buyer or net seller of credit derivative securities.
-Pension funds

Accepted Answer

The answer of Use the following two choices to identify...

Question 17

The average duration of the loans is 10 years. The average duration of the deposits is 3 years.  What is the change in the value of the FI's equity for a 1 percent increase in interest rates from the current rates of 10 percent ?

Accepted Answer

The answer of The average duration of the loans is...

Question 18

Use the following two choices to identify whether each intermediary or entity is a net buyer or net seller of credit derivative securities.
-Insurance companies

Accepted Answer

The answer of Use the following two choices to identify...

Question 19

Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. If the portfolio manager wants to shorten the bank's asset maturity, what type of risk is she concerned about?

Accepted Answer

The risk the portfolio manager is concerned about is the risk of rising interest rates. Shortening the asset maturity will decrease the duration of the portfolio and potentially reduce the impact of rising interest rates on the value of the Treasury bonds.

Question 20

Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. If T-bond futures prices decrease to 81-27/32^nds, what is the value of the futures hedge position?

Accepted Answer

The futures price of 81-27/32nds translates to 81.84375% of the par value. The value of the futures hedge position is calculated as 81.84375% of $30 million, which equals $24,553,125.

Quiz 22: Futures and Forwards

Use the following two choices to identify whether each intermediary or entity is a net buyer or net seller of credit derivative securities. -Hedge funds

Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. How can the portfolio manager use futures markets to protect against the risk exposure of rising interest rates?

Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. If Treasury bond futures prices are currently 89-00/32nds, what is the value of the Treasury bond futures hedge position?

Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. The bank's portfolio manager wants to shorten asset maturities. Which of the following statements is true?

Use the following two choices to identify whether each intermediary or entity is a net buyer or net seller of credit derivative securities. -Securities firms

Use the following two choices to identify whether each intermediary or entity is a net buyer or net seller of credit derivative securities. -Mutual funds

The average duration of the loans is 10 years. The average duration of the deposits is 3 years. What is the leveraged-adjusted duration gap of the bank's portfolio?

Use the following two choices to identify whether each intermediary or entity is a net buyer or net seller of credit derivative securities. -Banks

Use the following two choices to identify whether each intermediary or entity is a net buyer or net seller of credit derivative securities. -Corporations

The uniform guidelines issued by bank regulators for trading in futures and forwards

Use the following two choices to identify whether each intermediary or entity is a net buyer or net seller of credit derivative securities. -Pension funds

The average duration of the loans is 10 years. The average duration of the deposits is 3 years. What is the change in the value of the FI's equity for a 1 percent increase in interest rates from the current rates of 10 percent ?

Use the following two choices to identify whether each intermediary or entity is a net buyer or net seller of credit derivative securities. -Insurance companies

Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. If the portfolio manager wants to shorten the bank's asset maturity, what type of risk is she concerned about?

Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. If T-bond futures prices decrease to 81-27/32nds, what is the value of the futures hedge position?

Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. If Treasury bond futures prices are currently 89-00/32^nds, what is the value of the Treasury bond futures hedge position?

Conyers Bank holds Treasury bonds with a book value of $30 million. However, the Treasury bonds currently are worth $28,387,500. If T-bond futures prices decrease to 81-27/32^nds, what is the value of the futures hedge position?