Question 1

The current price of June $100,000 T-Bonds trading on the Chicago Board of Trade is 109-24.What is the price to be paid if the contract is delivered in June?

Accepted Answer

The answer of The current price of June $100,000 T-Bonds...

Question 2

The covariance of the change in spot exchange rates and the change in futures exchange rates is 0.6060,and the variance of the change in futures exchange rates is 0.5050.What is the estimated hedge ratio for this currency?

Accepted Answer

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Question 3

The notational value of the world-wide credit derivative securities markets stood at _________ trillion as of 2015,which compares to _________ trillion as of July 2008.

Accepted Answer

According to the statement, the notational value of the world-wide credit derivative securities markets stood at $22.6 trillion as of 2015, which compares to $54.6 trillion as of July 2008. Therefore, the correct choice is A) $22.6; $54.6.

Question 4

Which of the following indicates the need to place a hedge?

Accepted Answer

Hedging is needed when the price movement in the underlying cash asset cannot be forecasted perfectly, as it helps manage the risk associated with unpredictable price changes.

Question 5

An FI has reduced its interest rate risk exposure to the lowest possible level by selling sufficient futures to offset the risk exposure of its whole balance sheet or cash positions in each asset and liability.The FI is involved in

Accepted Answer

By selling sufficient futures to offset the risk exposure of its entire balance sheet or cash positions, the FI is engaging in routine or total hedging, which is an effective way to reduce interest rate risk exposure. Microhedging involves hedging individual securities or assets, while selective hedging involves hedging only certain risks, and overhedging involves hedging beyond necessary levels.

Question 6

Which of the following is an example of microhedging asset-side portfolio risk?

Accepted Answer

The answer of Which of the following is an example...

Question 7

How is a hedge ratio commonly determined?

Accepted Answer

A hedge ratio is commonly determined by running an ordinary least squares regression of changes in spot prices on changes in futures prices. This allows for the estimation of the slope coefficient, which represents the number of futures contracts required to hedge a given cash position. The hedge ratio is then the inverse of the slope coefficient.

Question 8

Which of the following measures the dollar value of futures contracts that should be sold per dollar of cash position exposure?

Accepted Answer

The measure that quantifies the amount of futures contracts to be sold per dollar of cash position exposure is the hedge ratio. It helps in minimizing the risk of loss from adverse price movements.

Question 9

Why does basis risk occur?

Accepted Answer

Basis risk occurs because changes in the spot price of an asset are not perfectly correlated with changes in the price of the asset delivered under a forward or futures contract. This can lead to a mismatch between the hedging instrument and the underlying asset, resulting in basis risk.

Question 10

If a 16-year 12 percent semi-annual $100,000 T-bond,currently yielding 10 percent,is used to deliver against a 20-year,8 percent T-bond at 114-16/32,what is the conversion factor? What would the buyer have to pay the seller?

Accepted Answer

The answer of If a 16-year 12 percent semi-annual $100,000...

Question 11

What is overhedging?

Accepted Answer

Overhedging refers to using more hedge vehicles than necessary to offset the risk in the cash asset. This can lead to additional costs and potentially reduce the overall effectiveness of the hedge. Therefore, option D is the best choice as it correctly defines overhedging. The other options either do not accurately define overhedging or describe other risk management strategies.

Question 12

Historical analysis of recent changes in exchange rates in both the spot and futures markets for a given currency reveals that spot rates are thirty percent more sensitive than futures prices.Given this information,the hedge ratio for this currency is

Accepted Answer

Hedge ratio = h = (∆St/∆f_t)= (1.30/1.00)= 1.30.

Question 13

In a credit forward contract transaction

Accepted Answer

The answer of In a credit forward contract transaction
...

Question 14

The covariance of the change in spot exchange rates and the change in futures exchange rates is 0.6606,and the variance of the change in futures exchange rates is 0.6060.The variance of the change in spot exchange rates is 0.9090.What is the degree of hedging effectiveness?

Accepted Answer

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Question 15

A credit forward is a forward agreement that

Accepted Answer

A credit forward is a type of forward agreement used to hedge against an increase in default risk on a loan after the loan rate has been determined and the loan issued. This type of agreement allows the lender to protect themselves against potential losses due to default by adding an extra layer of security to the loan. Therefore, option C is the correct choice.

Question 16

If a 12-year,6.5 percent semi-annual $100,000 T-bond,currently yielding 4.10 percent,is used to deliver against a 6-year,5 percent T-bond at 110-17/32,what is the conversion factor? What would the buyer have to pay the seller?

Accepted Answer

CFS1U1B1iS1U1B0 = PS1U1B1i,8.0%S1U1B0/FVS1U1B1iS1U1B0
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CF = 122,569/100,000 = 1.22569
Pay the seller CF F1F1F1S1F1F1F10 market value of contract bond = 1.2257 F1F1F1S1F1F1F10 110,531.25 = $135,478.

Question 17

When will the estimated hedge ratio be greater than one?

Accepted Answer

The estimated hedge ratio is the ratio of the change in the price of the underlying asset (e.g. currency) to the change in the price of the futures contract. If the spot rate changes are greater than the futures rate changes, it means that the underlying asset is more volatile than the futures contract. In this case, the estimated hedge ratio will be greater than one, as investors will need to purchase more futures contracts to fully hedge their exposure to the underlying asset.

Question 18

An FI issued $1 million of 1-year maturity floating rate commercial paper.The commercial paper is repriced every three months at the 91-day Treasury bill rate plus 2 percent.What is the FI's interest rate risk exposure and how can it use financial futures and options to hedge that risk exposure?

Accepted Answer

The FI is exposed to interest rate increases because the cost of its floating rate commercial paper will rise with increasing rates. Selling financial futures allows the FI to lock in current interest rates, offsetting the risk of rising rates.

Question 19

The number of futures contracts that an FI should buy or sell in a macrohedge depends on the

Accepted Answer

The number of futures contracts that an FI should buy or sell in a macrohedge depends on the size and direction of its interest rate risk exposure, as well as the return risk trade-off from fully hedging or selectively hedging that risk. Therefore, all of the options listed are important considerations when deciding how many futures contracts to trade.

Question 20

What is the purpose of a credit forward agreement?

Accepted Answer

The answer of What is the purpose of a credit...

Quiz 22: Futures and Forwards