TEST BANK
CAPITAL MARKETS: INSTITUTIONS AND INSTRUMENTS
FABOZZI/MODIGLIANI
Chapter 30
MARKET FOR INTEREST RATE RISK TRANSFER VEHICLES:
EXCHANGE-TRADED PRODUCTS
MULTIPLE CHOICE
1. Derivative instruments that are used to control interest rate risk include:
[E]
2. Futures contracts whose underlying instrument is a short-term debt obligation include:
[E]
3. The rate paid on Eurodollar CD futures is the:
[M]
4. The CBT determines which Treasury issues are acceptable for delivery of a Treasury
bond futures contract as long as it meets the following criteria:
5. The option of when in the delivery month of a CBT Treasury bond futures contract to
deliver is referred to as:
[M]
6. A wild card option is:
[M]
7. The theoretical futures price depends on which of the following factors?
[M]
8. If the shape of the yield curve is upward sloping and the cost of carry is positive, the
futures price will trade at a:
[M]
9. The futures price will trade at a premium to the cash price if:
10. The shape of the yield curve also influences when the short will choose to deliver. Thus,
if the carry is negative, the short will:
[D]
11. Interest rate futures can be used by market participants to:
[M]
12. An investor who wants to speculate that interest rates will rise:
[M]
13. An instrument, which gives the buyer the right to buy from or sell to the writer a
designated futures contract at a designated price at anytime during the life of the
instruments is called a:
[E]
14. When the futures option is exercised:
15. Speculation in interest rate futures differs from speculating with interest rate options in
that interest rate options:
[M]
16. The Black-Scholes model limits the use in pricing options on interest rate instruments as
a result of which of the following assumptions?
[D]
17. A pension sponsor, who wishes to alter the composition of the pension funds between
stocks and bonds, can use:
[M]
18. To alter the beta of a well-diversified stock portfolio, investment managers can use:
[M]
19. Institutional investors look for the mispricing of stock index futures to create arbitrage
profits and thereby enhance portfolio returns. This strategy is referred to as:
20. Dynamic hedging is an investment strategy, which:
[M]
TRUE/FALSE
1. Futures contracts are products created by exchanges.
[E]
2. The Eurodollar CD futures contract is a cash settlement contract.
[M]
3. The invoice price for the Treasury bond futures contract is the futures price minus
accrued interest.
[M]
4. Parties to the futures option will realize a position in a futures contract when the option is
exercised.
[E]
5. The arbitrage-free option-pricing models can incorporate different volatility assumptions
along the yield curve.
ESSAY QUESTIONS
1. Explain the delivery options embedded in the Treasury bond and note futures contracts
and their impact on the futures price.
Key Issues:
2. Explain how interest rate futures can be used to hedge against adverse interest rate
movements.
Key Issues:
3. Describe the mechanics of trading futures options.
Key Issues: