Chapter 14

Front 1

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

Back 1

Short; long

Front 2

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

Back 2

Derivatives

Front 3

A disadvantage of using forward contracts to hedge is

Back 3

That they are subject to default risk

Front 4

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 ________.

Back 4

Take a short position on an interest rate forward contract

Front 5

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 __________.

Back 5

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

Front 6

Futures contracts have an advantage over forward contracts in that.

Back 6

They are not subject to default risk and are more liquid

Front 7

A micro hedge is a hedge in which

Back 7

The hedge is for a specific asset it is holding

Front 8

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?

Back 8

Loss: $6,000

Front 9

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

Back 9

Fall to 101 due to arbitrage

Front 10

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?

Back 10

Go long 1,600 EUR futures contracts for a year

Front 11

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

Back 11

Go long 80 EUR futures contracts for three months

Front 12

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.

Back 12

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

Front 13

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

Back 13

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

Front 14

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

Back 14

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

Front 15

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

Back 15

The greater the price variability of the underlying asset

Front 16

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

Back 16

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

Front 17

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:

Back 17

Out of money

Front 18

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?

Back 18

Loss: $500

Front 19

An advantage to using interest-rate swaps is that

Back 19

They can be written over long horizons

Front 20

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

Back 20

Conduct an interest rate swap of variable for fixed rate assets

Front 21

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

Back 21

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

Front 22

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

Back 22

1050

Front 23

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

Back 23

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

Front 24

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:

Back 24

Buy a call on a credit option

Front 25

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:

Back 25

Credit default swap

Front 26

Interest forward contracts are limited in that:

Back 26

A counterparty is difficult to find

Front 27

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:

Back 27

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

Front 28

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:

Back 28

Take a long position with 100 364 day T-Bills

Front 29

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

Back 29

They can be written for a long time horizon

Front 30

Interest forward contracts are used to:

Back 30

Hedge against interest rate risk

Front 31

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:

Back 31

Credit linked note