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31 Cards in this Set

  • Front
  • Back

Agreeing to deliver an asset at some future date is called taking ______ position. Taking a ____ position can offset the risk

Short; long

Agreeing a result of increased volatility in financial markets, instruments called _____ were developed.


A disadvantage of using forward contracts to hedge is

That they are subject to default risk

A pension fund manager expects an inflow of 120 Million in six months. The manager thinks interest rates are going lower during this time. The manager could ________.

Take a short position on an interest rate forward contract

The portfolio you manage is holding $25 Million of 6s of 2023 Treasury Bonds with a price of 110. You would like to hedge the interest rate risk using forward contract on these for the next year. You could __________.

Take a short position for T-Bonds at the same interest rate and maturity

Futures contracts have an advantage over forward contracts in that.

They are not subject to default risk and are more liquid

A micro hedge is a hedge in which

The hedge is for a specific asset it is holding

You have bought a $100,000 June Treasury bond contract for 108. The price of the deliverable Treasury bond at the expiration date is 102. What is your profit or loss?

Loss: $6,000

At the expiration date, a deliverable Treasury bond is selling for 101 but the Treasury bond futures contract is selling for 102. The futures price will

Fall to 101 due to arbitrage

Your company will pay 200 M EUR in one year. You want to hedge the foreign exchange risk with a 125,000 EUR futures contract. How is this done?

Go long 1,600 EUR futures contracts for a year

Your company owes 10M EUR three months from now. How would you hedge the foreign exchange risk with 125,000 EUR futures contracts?

Go long 80 EUR futures contracts for three months

Your company will be receiving 30M EUR six months from now. The EUR is currently selling for 1 EUR per dollar. To hedge the exchange rate risk you could.

Enter a short forward contract for 30 M EUR at the current exchange rate

You manage a pension fund that is expecting an inflow of $100M next year. How can you use the futures market to ensure that you will earn the current rate of 8% when you invest long-term bonds with the funds

Take a long position for a year on 8s worth 100 million

Which of the following is not an advantage or disadvantage of using an options contract rather than a futures contract

An advantage of the options contract is that you don't have to pay a premium that you would have to pay with futures contract

As the term to expiration lengthens, _______ which causes a higher premium for the option

The greater the price variability of the underlying asset

A lower strike price implies a higher premium for a call option and a lower premium for a put option because:

The profit on a call is higher and the profit on a put is lower

You have bought a put option on a $100,000 Treasury bond futures contract with an exercise price of 95. The premium for the option was $4,000. The price of the Treasury bond at expiration is 120. You are:

Out of money

You have a call option on a $100,000 Treasury bond futures contract with an exercise price of 110. The premium was $1,500 and at expiration the futures contract has a price of 111. What is your profit or loss if you exercise the option?

Loss: $500

An advantage to using interest-rate swaps is that

They can be written over long horizons

To eliminate an income gap of $5M, a finance company would:

Conduct an interest rate swap of variable for fixed rate assets

To eliminate an income gap of -$42M, a savings and loan could

Conduct an interest rate swap of fixed for variable rate assets of $42M

A swap agreement calls for Durbin Industries to pay interest annually, based on a rate of 1.50%, over the one year T-Bill rate, currently 7.00%. In return, Durbin receives interest at a rate of 7.00% on a fixed-rate basis. The notional principal for swap is $70,000. What is Durbin's net interest payment for the year after the agreement


A financial derivative can create excessive risk in the financial system because:

It increases bank leverage and exposes banks to serious risk of failure

A fund manager who specializes in corporate bonds believes that credit spreads are going to tighten and that interest rates are going to continue to decline. To protect the fund, he could:

Buy a call on a credit option

Mason-Dixon has made extensive loans in its corporate credit portfolio to a property developer. It is looking for some kind of insurance against a downgrade of the developer by the major ratings agency because the developer's major project is running into unforeseen delays. Mason Dixon offers to pay Midwest National Bank a premium every six months for the next five years in exchange for which Midwest agrees to make payments to Mason-Dixon of a pre-set amount should the developer be downgraded. This an example of a:

Credit default swap

Interest forward contracts are limited in that:

A counterparty is difficult to find

National Savings and Loan Association accepts deposits and lends those funds for long-term mortgages. This means that the savings and loan is vulnerable to rising rates. National's best choice could be to:

Enter into a swap of interest payments on fixed assets for interest payments indexed to the T-Bill rate.

A pension fund manager is expecting to receive $10 Million in one year to invest. The fund manger is concerned about falling yields. Futures contracts are available in $100,000 lots. In order to lock in today's rate, the manager could:

Take a long position with 100 364 day T-Bills

Interest rate swaps have an advantage over options and futures in that:

They can be written for a long time horizon

Interest forward contracts are used to:

Hedge against interest rate risk

A type of derivative that offers borrowers a hedge against credit risk. and gives investors a higher yield n the note for accepting exposure to a specified credit even is called:

Credit linked note