Q&A Hero

Q: The realized return to a bank from a combined cash and futures market trading operation is composed of which of the following elements? A. Returns earned in the cash market B. Profit or loss from futures trading C. Difference between the opening and closing basis between cash and futures markets D. All of the options are correct E. Profit or loss from futures trading and the difference between the opening and closing basis between cash and futures markets

Q: A significant limitation to financial futures as an interest-rate hedging device is a special form of risk known as ___________ risk. Which of the following terms correctly completes the statement? A. default B. basis C. credit D. market E. None of the options are correct

Q: If a bank has a positive gap, that is, if it is asset sensitive, the bank can hedge its interest-rate risk by which of the following activities? A. Reducing maturities of its assets B. Reducing maturities of its liabilities C. Using a long hedge D. All of the options are correct E. Reducing maturities of its assets and liabilities

Q: A financial institution with a negative gap can reduce the risk of loss due to changing interest rates by: A. extending asset maturities. B. increasing short-term interest-sensitive liabilities. C. using financial futures or options contracts. D. All of the options are correct E. None of the options are correct

Q: A financial institution with a negative gap would like to receive the floating rate in an interest-rate swap.

Q: The number of futures contracts needed to hedge a position increases as the bank's duration gap increases.

Q: Virtually all banks in the U.S. use derivative contracts to hedge their risks.

Q: An interest-rate cap will become more valuable as interest rates rise.

Q: Most derivatives (measured by notional value) are traded on organized exchanges.

Q: Many banks are not only users of derivative products but also dealers.

Q: An interest-rate cap on a loan would protect the lender.

Q: A reverse swap is where the parties exchange the principal payments instead of the interest payments on loans.

Q: Basis risk exists on interest rate swaps because the interest rate on the swap agreement may differ from the interest rate on assets and liabilities that the parties hold.

Q: An interest rate collar sets both, a minimum and a maximum interest rate on a variable rate loan agreement.

Q: Interest rate floors protect the lender from falling interest rates.

Q: Interest rate caps protect the lender from falling interest rates.

Q: Unlike futures contracts, interest rate swap agreements have no basis risk.

Q: One advantage of an interest rate swap agreement is that the brokerage fees are very low.

Q: In most interest rate swaps, netting reduces the default risk because the parties actually exchange only the difference in the interest payments.

Q: A currency swap is where two parties agree to exchange interest payments in order to hedge against interest rate risk.

Q: In a typical quality swap, a borrower with a positive duration gap is more likely to pay all or part of the other swap party's long-term interest rate.

Q: Basis risk is the difference in the interest rates (or prices) of the same security between the cash market and the futures market.

Q: One of the significant disadvantages of using futures contracts to hedge against interest rate risk is the high commissions that must be paid to brokers.

Q: A bank will use a short hedge in the futures market to avoid higher borrowing costs or to protect against declining asset values.

Q: If a financial institution makes an offsetting sale and purchase of the same futures contract, it has no obligation either to deliver or take delivery of the contract.

Q: A futures contract is "marked-to-market" weekly to reflect the current market price of the contract. This means that one or the other party has to make a cash payment to the exchange at the end of each week.

Q: The market value of a futures contract changes daily as the market price of the underlying security price changes.

Q: Banks are generally writers (sellers) of put and call option contracts.

Q: Money center banks appear to use option contracts to protect the value of a bond portfolio or to hedge against interest-sensitive or duration gaps.

Q: The sensitivity of the market price of a financial futures contract depends partly upon the duration of the security to be delivered under the futures contract.

Q: A financial institution confronted with a negative interest-sensitive gap could avoid unacceptable losses from rising interest rates by covering the gap with a short hedge.

Q: A financial institution with a positive interest-sensitive gap and anticipating falling interest rates could protect against loss by covering the gap with a long hedge.

Q: The short hedge would usually be the correct choice if a bank is concerned about avoiding lower than expected yields from loans and security investments.

Q: The long hedge in financial futures contracts is most likely to be used in situations where a bank would suffer losses due to rising interest rates.

Q: The short hedge in financial futures contracts is most likely to be used in situations where a bank would suffer losses due to falling interest rates.

Q: A futures hedge against interest-rate changes generally requires a bank to take an opposite position in the futures market from its current position in the cash market.

Q: U.S. Treasury bond futures contracts call for the future delivery of U.S. T-bonds with minimum denominations of $100,000 and minimum maturities of 15 years.

Q: A hedging tool that provides "one-sided" insurance against interest rate risk is the interest rate option, which, like financial futures contracts, obligates the parties to the contract to either deliver or take delivery of securities.

Q: 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.

Q: 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.

Q: 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.

Q: 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.

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

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

Q: 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.

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

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

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

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

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

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

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

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

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

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

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

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

Q: In an interest-rate swap, the principal amount of the loan, usually called the ________________________, is not exchanged.

Q: A(n) _________________________ is where there is both a minimum and a maximum interest rate set on a loan.

Q: A(n) _________________________ protects the lender from falling interest rates. It is the minimum rate that the borrower must pay on a floating-rate loan.

Q: A(n) _________________________ protects the holder from rising market interest rates. It sets the maximum interest rate that a lender can charge on a floating-rate loan.

Q: A(n) _________________________ is an agreement between two parties where they agree to exchange, based on a predetermined agreement, amounts in different currencies. It is designed to reduce exchange rate risks.

Q: A(n) _________________________ is a contract where two parties exchange interest payments in order to save money and hedge against interest rate risks.

Q: In an interest rate swap agreement, __________________ reduces the default risk. This is where the swap parties exchange only the net difference between the interest payments owed.

Q: A(n) _________________________ is a new swap agreement which offsets the original interest rate swap contract.

Q: In an interest rate swap, the ________________________ or principal amount is not exchanged.

Q: A(n) _________________________ is a contract where a borrower with a lower credit rating enters into an agreement with a borrower with a higher credit rating to exchange interest payments.

Q: The buyer of a(n) _________________________ option contract believes that the market price of the underlying security will increase in the future.

Q: Most options today are traded on a(n) ________________________. These options are standardized to make offsetting an existing position easier.

Q: Futures contracts are _________________________ daily, which means that futures contracts are settled each day as their market value changes.

Q: A(n) _________________________ allows the holder the right to either sell securities to another investor (put) or buy securities from another investor (call) at a set price before the expiration date.

Q: A(n) _________________________ is the fee a buyer must pay to be able to put securities to, or to call securities away from the option writer.

Q: _________________________ is the difference in interest rates (or prices) between the cash market and the futures market on an underlying security.

Q: A financial institution goes _________________________ in the futures market by buying a futures contract.

Q: A financial institution goes _________________________ in the futures market by selling a futures contract.

Q: A(n) _________________________ is an agreement between a buyer and a seller today which calls for the delivery of a particular security in exchange for cash at some future date for a set price.

Q: The assets and liabilities of Finacle Bank as on December 31, 2015, are as follows: $20,000 of short-term securities issued by governments and private borrowers (about to mature), $12,000 of borrowings from the money market, $15,000 of short-term savings accounts, $12,000 of variable-rate loans and securities, $18,000 of long-term loans made at a fixed interest rate, $25,000 of long-term savings and retirement accounts, $22,000 of deposits in the Central Bank (held as legal reserves), $550,000 of equity capital provided by the bank's owners, and $500,000 of building and equipment. What is the total of repriceable assets held by the bank as on December 31, 2015? A. $32,000 B. $50,000 C. $45,000 D. $55,000 E. $52,000

Q: The interest rate on one year Treasury Bonds is 5 percent. The interest rate on five year Treasury Bonds is 7.5 percent. The interest rate on ten year Treasury Bonds is 10 percent. What is true about the yield curve? A. It is upward sloping. B. It is downward sloping. C. It is a horizontal curve. D. It is a vertical curve. E. It is parallel to the x-axis.

Q: The Raymond Burr National Bank has $1,000 in assets with an average duration of 5 years. This bank has $800 in liabilities with an average duration of 6.25 years. Market interest rates start at 6 percent and fall by 1 percent. What is the change in net worth of this bank? A. $11.29 B. -$11.29 C. $0 D. -$22.22 E. $22.22

Q: Maryellen Epplin notices that a particular T-Bill has a banker's discount rate of 9 percent in the Wall Street Journal. She knows that this T-Bill has 20 days to maturity and has a face value of $10,000. What is the yield to maturity on this T-Bill? A. 9 percent B. 0.5 percent C. 4.5 percent D. 9.17 percent E. None of the options is correct.