Question 1

An effective hedge is one where the positive or negative returns earned in the cash market are approximately offset by the profit or loss from futures trading.

Accepted Answer

This is the definition of an effective hedge.

Question 2

On the exchange floor,_________ execute orders received from the public to buy and sell the futures contract at the best possible price.

Accepted Answer

The answer of On the exchange floor,_________ execute orders received...

Question 3

Futures contracts can be traded ________,without the help of an organized exchange.

Accepted Answer

The answer of Futures contracts can be traded ________,without the...

Question 4

The category of derivative contracts with the largest use by banks is _________.

Accepted Answer

The answer of The category of derivative contracts with the...

Question 5

There are some significant limitations to financial futures as interest-rate hedging devices;among them is a special form of risk known as credit risk.

Accepted Answer

Credit risk, or the risk that the counterparty will default on its obligations, is not a primary concern with financial futures because they are traded on exchanges that typically require participants to post margin and have clearinghouses that guarantee the trades, thus mitigating credit risk. The main risks associated with financial futures for interest-rate hedging are market risk and basis risk, not credit risk.

Question 6

When a financial institution offers to sell financial futures contract,it is agreeing to take delivery of certain kinds of securities on a stipulated date at a predetermined price.

Accepted Answer

When a financial institution offers to sell financial futures contract, it is agreeing to deliver certain kinds of securities on a stipulated date at a predetermined price, not take delivery.

Question 7

One of the most popular methods of neutralizing duration gap risks is to buy and sell financial futures contracts.

Accepted Answer

Financial futures contracts can be used to hedge against interest rate movements and adjust the duration of a portfolio. By buying or selling futures contracts, investors can adjust the timing and size of cash flows to help mitigate against duration gap risks.

Question 8

The financial futures markets are designed to shift the risk of interest rate fluctuations from risk-averse investors to ________.

Accepted Answer

The answer of The financial futures markets are designed to...

Question 9

When investors buy or sell a futures contract,they must deposit a(n)_________ when they first enter into the contract.

Accepted Answer

The answer of When investors buy or sell a futures...

Question 10

_________ are financial instruments that derive their value from some underlying asset.

Accepted Answer

The answer of _________ are financial instruments that derive their...

Question 11

The financial futures markets are designed to shift the risk of interest rate fluctuations from risk-averse investors to speculators who are willing to accept and possibly profit from such risks.

Accepted Answer

This statement is true. Financial futures markets allow investors and speculators to trade contracts that represent a future obligation to buy or sell an underlying asset at a predetermined price. These contracts can be used to hedge against interest rate fluctuations or to speculate on potential price movements. By participating in these markets, investors can shift the risk of interest rate fluctuations to speculators who are willing to accept and possibly profit from such risks.

Question 12

The most actively traded futures contract in the world is the ________.It is traded on exchanges in Chicago,London,Tokyo,Singapore and elsewhere and allows investors the opportunity to hedge against market interest rate changes.

Accepted Answer

The answer of The most actively traded futures contract in...

Question 13

An interest-rate ________ would protect the swap party receiving a floating-rate payment in a swap.

Accepted Answer

The answer of An interest-rate ________ would protect the swap...

Question 14

One reason that banks use derivatives is to generate ________,the money that does not come from interest earned on loans and securities.

Accepted Answer

The answer of One reason that banks use derivatives is...

Question 15

The buyer of a call option has the right to buy from the writer of the option contract,securities at the ________.

Accepted Answer

The answer of The buyer of a call option has...

Question 16

_______ is the spread between the cash price and futures price of an underlying asset.

Accepted Answer

The answer of _______ is the spread between the cash...

Question 17

The combination of both a cap and floor is known as an interest-rate ________.

Accepted Answer

The answer of The combination of both a cap and...

Question 18

The _________ largest U.S.FDIC-insured banking companies account for more than 90 percent of bank derivatives activity in the U.S.

Accepted Answer

The answer of The _________ largest U.S.FDIC-insured banking companies account...

Question 19

An interest-rate _______ would protect the swap party receiving a fixed-rate payment and making a floating-rate payment in a swap.

Accepted Answer

The answer of An interest-rate _______ would protect the swap...

Question 20

The _________ is determined by the clearing house and is used to calculate the mark-to-market amounts.

Accepted Answer

The answer of The _________ is determined by the clearing...

Quiz 14: Investment Banking,Insurance,and Other Sources of Fee Income