A) Trying to avoid higher borrowing costs
B) Trying to avoid declining asset values
C) Trying to avoid lower than expected yields on from loans and securities
D) A and B above
94. Suppose a bank has an asset duration of 5 years and a liability duration of 2.5 years. This bank
has $1000 million in assets and $750 million in liabilities. They are planning on trading in a
Treasury bond future which has a duration of 8.5 years and which is selling right now for $99,000
for a $100,000 contract. How many futures contracts does this bank need to fully hedge itself
against interest rate risk?
A) 3714 contracts
B) 3125 contracts
C) 2971 contracts
D) 371 contracts
E) None of the above
95. A bank wishes to sell $350 million in new 30-day time deposits next month. Today interest rates
are 7 percent. However, next month interest rates are expected to rise to 7.75 percent. What is
the potential loss in profit for the month from this increase in interest rates? (Use a 360 day year)
A) $27.125 million
B) $24.500 million
C) $.2188 million
D) $2.625 million
E) There is no potential loss from this increase
96. A futures contract on a 30 day Eurodollar time deposit is currently selling at an IMM index of
95.75 percent. The IMM index on a 30 day Eurodollar time deposit for immediate delivery is
95.10 percent. What is the basis risk for the futures contract?
A) 65 basis points
B) –65 basis points
C) 490 basis points
D) 425 basis points
E) There is no basis risk on this contract
97. Suppose a T-Bond futures contract has a duration of 9 years and has a current market price of
$98,750. Market interest rates are 6 percent today but are expected to rise to 7.5 percent. What is
the change in this futures contract’s market price from this change in interest rates?
A) $12,577
B) -$12,577
C) $62,883
D) -$62,883
E) None of the above
98. Suppose a Eurodollar time deposit futures contract has a duration of .5 years and has a current
market price of $950,000. Market interest rates are 8.5 percent and are expected to fall to 7.5
percent. What is the change in this futures contract’s market price from this change in interest
rates?
A) $4378
B) -$4378
C) $30,645
D) -$30,645
E) None of the above
99. A financial institution that goes long in the futures market:
A) Has the right to accept delivery of the underlying security at the contract price if they wish
B) Has the right to make delivery of the underlying security at the contract price if they wish
C) Is obligated to accept delivery of the underlying security at the contract price
D) Is obligated to make delivery of the underlying security at the contract price
100. A bank that goes short in the futures market:
A) Has the right to accept delivery of the underlying security at the contract price if they wish
B) Has the right to make delivery of the underlying security at the contract price if they wish
C) Is obligated to accept delivery of the underlying security at the contract price
D) Is obligated to make delivery of the underlying security at the contract price
101. A financial institution that buys a put option:
A) Has the right to accept delivery of the underlying security at the contract price if they wish
B) Has the right to make delivery of the underlying security at the contract price if they wish
C) Is obligated to accept delivery of the underlying security at the contract price
D) Is obligated to make delivery of the underlying security at the contract price
102. A bank that buys a call option:
A) Has the right to accept delivery of the underlying security at the contract price if they wish
B) Has the right to make delivery of the underlying security at the contract price if they wish
C) Is obligated to accept delivery of the underlying security at the contract price
D) Is obligated to make delivery of the underlying security at the contract price
103. Interest rate hedging devices used by banks today include which of the following:
A) Financial futures contracts.
B) Interest-rate options contracts.
C) Interest rate swaps.
D) Interest rate caps, floors, and collars.
E) All of the above.
104. An interest rate swap is:
A) A way to change a bank’s exposure to interest rate fluctuations.
B) A way to achieve lower borrowing costs.
C) A way to convert from fixed rates to floating rates.
D) A way to transform actual cash flows through the bank to more closely match desired cash
flow patterns.
E) All of the above.
105. An interest rate collar:
A) Combines a rate floor and a rate cap into one agreement.
B) Ranges in maturity from a few days to a few weeks.
C) Protects a lender from rising interest rates.
D) All of the above.
E) B and C only.
106. An agreement where two parties agree to exchange different currencies is known as:
A) An interest rate swap
B) A currency swap
C) A swaption
D) A quality swap
E) None of the above
107. The part of an agreement which allows one or both parties to make certain changes to the
agreement or eliminate the agreement is called:
A) An interest rate swap
B) A currency swap
C) A swaption
D) A quality swap
E) None of the above
108. An agreement where a party with a lower credit rating enters into an agreement to exchange
interest payments with a borrower having a higher credit rating is know as:
A) An interest rate swap
B) A currency swap
C) A swaption
D) A quality swap
E) None of the above
109. Which of the following is an advantage of an interest rate swap agreement?
A) Little or no basis risk
B) Low brokerage fees
C) Increased flexibility over other hedging techniques
D) Little or no credit risk
E) All of the above are advantages of interest rate swap agreements.
110. Which of the following is a disadvantage of an interest rate swap agreement?
A) Basis risk
B) High brokerage fees
C) Default risk
D) Interest rate risk
E) All of the above are disadvantages of interest rate swap agreements.
111. Interest rate swaps:
A) First developed in the 1980s
B) Are one of the oldest interest rate hedging devices
C) Allows for the exchange of different currencies by two parties
D) Are rigid and inflexible
E) Are none of the above
112. Interest rate caps:
A) First developed in the 1980s
B) Are one of the oldest interest rate hedging devices
C) Allow for the exchange of different currencies by two parties
D) Protect lenders from falling interest rates
E) B and D above
113. The approximate percentage of banks who reportedly use derivative contracts is:
A) 12%
B) 25%
C) 50%
D) 75%
E) 100%
114. All of the following interest-rate futures contracts are traded on exchanges except:
A) Eurodollar futures contract
B) Treasury Bond futures contract
C) Eurodollar time deposit futures contract
D) Federal Funds futures contract
E) Corporate Bond futures contract
115. A bank with a duration gap of 2 years and total assets of $100 million uses a futures contract with
a duration of .5 years and a price of $100,000 to hedge. The number of contracts that are needed
is:
A) 2000
B) 4000
C) 8000
D) 10,000
E) 20,000
116. The floating-rate payer in a swap may want to buy an interest-rate:
A) Floor
B) Cap
C) Collar
D) Option
E) Neither a floor nor a cap
117. When an investor first purchases or sells a futures contract, she must make a deposit to
the exchange. This is called the:
A) Initial margin
B) Floor broker
C) Settlement price
D) Open interest
E) Clearinghouse
118. The person who executes orders in the futures market for the public is called the:
A) Day trader
B) Floor broker
C) Bank examiner
D) Speculator
E) Scalper
119. When contracts are marked to market at the end of each day, the amount that is used to
determine this is called the:
A) Initial margin
B) Floor broker
C) Settlement price
D) Open interest
E) Clearinghouse
120. The number of contracts that have been established and not yet offset or exercised is
called by the Wall Street Journal.
A) Initial margin
B) Floor broker
C) Settlement price
D) Open interest
E) Clearinghouse
121. The amount of initial margin, the settlement price and other rules regarding trading
futures contract are determined by:
A) SEC
B) Floor brokers
C) Dealers
D) Open interest
E) Clearinghouse
122. Julie Wells has found a Treasury Bond futures contract that has a duration of 8.5 years
and is currently selling for $97,500. Interest rates are currently 8% and are expected to
rise 1.5%. What is the change in this future contract’s price for this change in interest
rates?
A) $1462.50
B) $12,431.25
C) -$11,521.42
D) -$1462.50
E) -$12,431.25
123. The Kromwell Community Bank has an average duration for its asset portfolio of 6
years. It also has an average duration for its liability portfolio of 2.5 years. This bank
has $ $500 million in total assets and $450 million in liabilities. The Kromwell
Community Bank is thinking about hedging their risk by using a Treasury Bond futures
contract with a duration of 7.5 years and a price of $98,000. How many futures
contracts will the Kromwell Community Bank need use to hedge their risk?
A) 2381 contracts
B) 2551 contracts
C) 3061 contracts
D) 4464 contracts
E) None of the above
124. A Treasury Bond futures contract is selling in the market for $98,225 and has a
duration of 8 years. The same Treasury Bond is selling in the cash market for $98,625
and has a duration of 8.25 years. What is the basis for this futures contract?
A) $400
B) .25 years
C) $28,156.25
D) $1600
E) None of the above
125. What type of futures contract tends to accurately predict the consensus opinion as to
actions to be taken by the Federal Open Market Committee in the future?
A) U.S. Treasury Bond futures contract
B) Eurodollar time deposit futures contract
C) One month LIBOR futures contract
D) Federal Funds futures contract
E) All of the above
126. Which of the following is one of the risks the OCC requires banks to measure and set
limits on?
A) Strategic risk
B) Reputation risk
C) Price risk
D) Liquidity risk
E) All of the above
127. What is the objective of a fair value hedge?
A) To offset the losses due to changes in the value of an asset or liability
B) To reduce the risk associated with future cash flows
C) To maximize future cash flows
D) To maximize the value of an asset or minimize the value of a liability
E) None of the above
128. What is the objective of a cash flow hedge?
A) To offset the losses due to changes in the value of an asset or liability
B) To reduce the risk associated with future cash flows
C) To maximize future cash flows
D) To maximize the value of an asset or minimize the value of a liability
E) None of the above
129. Which of the following is a characteristic of a swap buyer?
A) Prefers flexible, short-term interest rate
B) Generally has a higher credit rating
C) Often has a positive duration
D) Generally has a large holding of short-term assets
E) All of the above
130. Which of the following is a characteristic of a swap seller?
A) Prefers fixed-rate longer term loans
B) Generally has a lower credit rating
C) Often has a positive duration
D) Generally has a large holding of short-term assets
E) All of the above
131. Which of the following is a characteristic of a swap buyer?
A) They generally have a lower credit rating
B) They prefer fixed rate longer term loans
C) They often have a positive duration
D) They generally have substantial holdings of longer term assets
E) All of the above
132. Which of the following is a characteristic of a swap seller?
A) They generally have a higher credit rating
B) They prefer flexible short-term interest rate
C) They often have a negative duration
D) They generally have large holdings of short-term assets
E) All of the above
133. A swap where the notional amount is constant is called:
A) A quality swap
B) A bullet swap
C) An amortizing swap
D) An accruing swap
E) None of the above
134. A swap where the notional amount declines over time is called:
A) A quality swap
B) A bullet swap
C) An amortizing swap
D) An accruing swap
E) None of the above
135. A swap where the notional amount accumulates over time is called:
A) A quality swap
B) A bullet swap
C) An amortizing swap
D) An accruing swap
E) None of the above
136. Which of the following is a difference between futures and forward contracts?
A) Futures contracts are market-to-market daily, while forward contracts are not
B) Buyers and sellers deal directly with each other on forward contracts but go through
organized exchanges in futures contracts
C) Futures contracts are standardized, forward contracts generally are not
D) Forward contracts are generally more risky because no exchange guarantees the
settlement of each contract if one or the other party to the contract defaults
E) All of the above are differences between futures and forward contracts
137. The daily settlement process that credits gains or deducts losses from a futures
customer’s account is called:
A) The variation margin
B) Marking-to-market
C) The initial margin
D) The maintenance margin
E) The notional value
138. Assume that two firms, one considered a high credit risk (HCR) and the other a low
credit risk (LCR), are considering an interest rate swap. Each can borrow at the following
rates:
Fixed Rate
Variable Rate
LCR
8%
5%
HCR
12%
7%
An interest rate swap would be beneficial to both parties if:
A) The LCR firm wants to borrow at the fixed rate and the HCR firm wants to borrow
at the variable rate.
B) The HCR firm wants to borrow at the fixed rate and the LCR firm wants to borrow
at the variable rate.
C) Both firms want to borrow at the variable rate.
D) Both firms want to borrow at the fixed rate.
E) An interest rate swap would be never beneficial in this situation.