Question 1

A forward contract specifies immediate delivery for immediate payment.

Accepted Answer

A forward contract is an agreement between two parties to buy or sell an asset at a certain future date at an agreed price. It is not for immediate delivery or payment.

Question 2

Federal regulations in the U.S.allow derivatives to be used only by the 25 largest banks.

Accepted Answer

Federal regulations in the U.S. do not limit the use of derivatives by the 25 largest banks only. While there are regulations in place to regulate the use of derivatives by banks, they are not limited to just the largest banks.

Question 3

A spot contract specifies deferred delivery and payment.

Accepted Answer

A spot contract is for immediate delivery and payment, not deferred.

Question 4

Commercial banks,investment banks,and broker-dealers are the major forward market participants.

Accepted Answer

Commercial banks, investment banks, and broker-dealers are the major participants in the forward market, as they assist in the execution of forward contracts and provide liquidity to the market.

Question 5

As of 2015,U.S.commercial banks held over $42 trillion of forward contracts that were listed for trading on the Chicago Mercantile exchange.

Accepted Answer

There is no publicly available data to support this claim. The figure provided seems highly unlikely given that the total value of all financial derivatives held by U.S. commercial banks in the third quarter of 2015 was around $207 trillion according to the Office of the Comptroller of the Currency.

Question 6

An FI with a positive duration gap is exposed to interest rate declines and could hedge its interest rate risk by buying forward contracts.

Accepted Answer

The answer of An FI with a positive duration gap...

Question 7

A forward contract has only one payment cash flow that occurs at the time of delivery.

Accepted Answer

In a forward contract, there is typically only one payment cash flow that occurs at the time of delivery, where the buyer pays the agreed-upon price to the seller for the underlying asset.

Question 8

In a forward contract agreement,the quantity of product to be traded,the time of the actual trade and the price are determined at the time of the agreement.

Accepted Answer

In a forward contract agreement, the quantity of product to be traded, the time of the actual trade, and the price are all determined at the time of the agreement. Therefore, this statement is true.

Question 9

Delivery of the underlying asset almost always occurs in the futures market.

Accepted Answer

Delivery of the underlying asset in the futures market is not necessary in most cases. The majority of futures contracts are settled financially, meaning that the buyer and seller exchange the difference in price between the contract's opening and closing positions rather than exchanging the underlying asset itself. Physical delivery is only required in rare cases, such as with certain agricultural or energy futures contracts.

Question 10

An FI with a negative duration gap is exposed to interest rate declines and could hedge its interest rate risk by buying forward contracts.

Accepted Answer

A negative duration gap means that the FI's assets are more sensitive to interest rate changes than its liabilities. Therefore, it is more vulnerable to interest rate declines. Buying forward contracts can help the FI lock in a certain interest rate in the future, thereby hedging its interest rate risk.

Question 11

As of 2015,commercial banks held more forward contracts than futures contracts for trading.

Accepted Answer

According to data from the Bank for International Settlements, as of 2015, commercial banks held $15.4 trillion worth of forward contracts for trading, compared to $3.3 trillion worth of futures contracts.

Question 12

The notational value of derivative contracts for the top 25 derivative users was less than the total current credit risk exposure of those contracts as of 2015.

Accepted Answer

The notational value of derivative contracts for the top 25 derivative users is typically much larger than the total current credit risk exposure of those contracts. The notational value represents the total value of the contracts, while the credit risk exposure is usually a much smaller amount, reflecting the potential loss if the counterparty defaults.

Question 13

Forward contracts are marked-to-market on a daily basis.

Accepted Answer

Forward contracts are not marked-to-market daily; instead, they are settled at the end of the contract term, unlike futures contracts which are marked-to-market daily.

Question 14

A futures contract has only one payment cash flow that occurs at the time of delivery.

Accepted Answer

A futures contract has two payment cash flows - one that occurs at the time of entering into the contract (initial margin) and another that occurs at the time of delivery (final settlement).

Question 15

Derivative contracts allow an FI to manage interest rate and foreign exchange risk.

Accepted Answer

Derivative contracts such as interest rate swaps and currency forwards allow FIs to hedge against potential losses due to fluctuations in interest rates and foreign exchange rates. Thus, they can effectively manage interest rate and foreign exchange risk.

Question 16

The Financial Accounting Standards Board requires that all derivatives be marked-to-market with any losses and gains transparent on FI's financial statements.

Accepted Answer

This statement is true. The Financial Accounting Standards Board (FASB) requires that all derivatives be marked-to-market, which means they must be valued at their fair market value as of the balance sheet date. Any losses and gains must be recognized on FI's financial statements. This is known as fair value accounting.

Question 17

Forward contracts are individually negotiated and,therefore,can be unique.

Accepted Answer

Forward contracts are customized according to the needs of the parties involved, so they can differ significantly in terms of the underlying asset, price, and delivery date. Therefore, each contract is usually unique and tailored to the specific requirements of the counterparties.

Question 18

Futures contracts are the primary security that insurance companies and banks use to hedge interest rate risk prior to originating mortgages.

Accepted Answer

Insurance companies and banks primarily use interest rate swaps, not futures contracts, to hedge interest rate risk prior to originating mortgages. Interest rate swaps allow these institutions to exchange variable interest rate payments for fixed-rate payments, thus managing their exposure to interest rate fluctuations.

Question 19

A perfect hedge,or perfect immunization,seldom occurs.

Accepted Answer

A perfect hedge or immunization is nearly impossible to attain due to constantly changing market conditions and other external factors.

Question 20

Immunizing the balance sheet against interest rate risk means that gains (losses)from an off-balance-sheet hedge will exactly offset losses (gains)from the balance sheet position.

Accepted Answer

Immunizing the balance sheet means creating a perfect hedge where gains and losses from the off-balance-sheet hedge will offset losses and gains from the balance sheet position.

Quiz 22: Futures and Forwards