1. Federal regulations in the U.S. allow derivatives to be used only by the 25 largest banks.
2. Derivative contracts allow an FI to manage interest rate and foreign exchange risk.
3. The replacement cost of the derivative contracts for the top 25 derivative users was greater than the credit
exposure as of June 2009.
4. The Financial Accounting Standards Board requires that all derivatives be marked-to-market with any losses
and gains transparent on FI’s financial statements.
5. A spot contract specifies deferred delivery and payment.
6. A forward contract specifies immediate delivery for immediate payment.
7. In a forward contract agreement, the quantity of product to be traded, the time of the actual trade and the
price are determined at the time of the agreement.
8. Forward contracts are individually negotiated and, therefore, can be unique.
9. Commercial banks, investment banks, and broker-dealers are the major forward market participants.
10. As of June 2009, U.S. commercial banks held over $42 trillion of forward contracts that were listed for
trading on the Chicago Mercantile exchange.
11. Forward contracts are marked-to-market on a daily basis.
12. A forward contract has only one payment cash flow that occurs at the time of delivery.
13. A futures contract has only one payment cash flow that occurs at the time of delivery.
14. Delivery of the underlying asset almost always occurs in the futures market.
15. As of June 2009, commercial banks held more forward contracts than futures contracts for trading.
16. Futures contracts are the primary security that insurance companies and banks use to hedge interest rate risk
prior to originating mortgages.
17. A perfect hedge, or perfect immunization, seldom occurs.
18. Immunizing the balance sheet against interest rate risk means that gains (losses) from an off-balance-sheet
hedge will exactly offset losses (gains) from the balance sheet position.
19. An FI with a positive duration gap is exposed to interest rate declines and could hedge its interest rate risk
by buying forward contracts.
20. An FI with a negative duration gap is exposed to interest rate declines and could hedge its interest rate risk
by buying forward contracts.
21. An off-balance-sheet forward position is used to hedge the FI’s on-balance-sheet risk exposure.
22. More FIs fail due to credit risk exposure than exposure to either interest rate risk or foreign exchange risk.
23. It is not possible to separate credit risk exposure from the lending process itself.
24. Microhedging uses futures or forward contracts to hedge the entire balance sheet duration gap.
25. Macrohedging uses a derivative contract, such as a futures or forward contract, to hedge a particular asset or
liability risk.
26. Routine hedging will allow the FI to achieve greater return from the assets and liabilities on the balance
sheet.
27. Selective hedging that results in an over-hedged position may be regarded as speculative by regulators.
28. Selective hedging occurs by reducing the interest rate risk by selling sufficient futures contracts to offset the
interest rate risk exposure of a portion of the cash positions on the balance sheet.
29. Hedging selectively only a portion of the balance sheet is an attempt to increase the return of the FI by
accepting some level of interest rate risk.
30. The sensitivity of the price of a futures contract depends on the duration of the deliverable asset underlying
the contract.
31. All bonds that are deliverable under a Treasury bond futures contract have a maturity of 20 years and an
interest rate of 8 percent.
32. Hedging a specific on-balance-sheet cash position usually will only require more T-bill futures contracts
than hedging the same cash position with T-bond futures contracts because the T-bond contract size is only 10
percent as large as the T-bill contract.
33. A conversion factor often is to figure the invoice price on a futures contract when a bond other than the
benchmark bond is delivered to the buyer.
34. Basis risk occurs when the underlying security in the futures contract is not the same asset as the cash asset
on the balance sheet.
35. An adjustment for basis risk with a value of “br” less than one means that the percent change in the spot
rates is greater than the change in rate in the deliverable bond in the futures market.
36. Hedging foreign exchange risk in the futures market may involve uncertainty about all of the transactions
necessary to achieve the hedge to fulfillment.
37. Tailing-the-hedge normally requires an FI manager to utilize more futures contracts to hedge a cash position
than are warranted by the initial analysis.
38. The hedge ratio measures the impact that tailing-the-hedge will have on the number of contracts necessary
to hedge the cash position.
39. Hedging effectiveness often is measured by the squared correlation between past changes in the spot asset
prices and futures prices.
40. In a credit forward agreement hedge, the loss on the balance sheet cash position is offset completely by the
gain on the off-balance-sheet credit forward agreement if the characteristics of the benchmark bond and the
bank’s loan to the borrower are the same.
41. A credit forward agreement specifies a credit spread on a benchmark U.S. Treasury bond.
42. Catastrophe futures are designed to hedge extreme losses of natural disasters for property-casualty insurance
companies.
43. The payoff on a catastrophe futures contract is adjusted for the actual loss ratio of the insurer.
44. The use of futures contracts by banks is subject to risk-based capital guidelines through the
off-balance-sheet risk calculations for risk-based capital.
45. Financial futures can be used by FIs to manage
46. A forward contract
47. A futures contract
48. Which of the following identifies the largest group of derivative contracts as of June 2009?
49. Which of the following group of derivative securities had the smallest notational value among the top 25
FIs?
50. An agreement between a buyer and a seller at time 0 to exchange a standardized, prespecified asset for cash
at a specified later date is characteristic of a
51. An agreement between a buyer and a seller at time 0 where the seller of an asset agrees to deliver an asset
immediately and the buyer agrees to pay for the asset immediately is the characteristic of a
52. An agreement between a buyer and a seller at time 0 to exchange a prespecified asset for cash at a specified
later date is the characteristic of a
53. What is a difference between a forward contract and a future contract?
54. The primary benefit of a futures exchange is
55. The terms of futures contracts traded in the U.S. are set by the exchange on which they propose to be traded,
but are subject to approval by the
56. Futures contracts are standard in terms of all of the following EXCEPT
57. A naive hedge occurs when
58. Routine hedging
59. An FI issued $1 million of 1-year maturity floating rate commercial paper. The commercial paper is
repriced every three months at the 91-day Treasury bill rate plus 2 percent. What is the FI’s interest rate risk
exposure and how can it use financial futures and options to hedge that risk exposure?
60. The number of futures contracts that an FI should buy or sell in a macrohedge depends on the
61. Which of the following indicates the need to place a hedge?
62. Which of the following is an example of microhedging asset-side portfolio risk?
63. An FI has reduced its interest rate risk exposure to the lowest possible level by selling sufficient futures to
offset the risk exposure of its whole balance sheet or cash positions in each asset and liability. The FI is
involved in
64. What is overhedging?
65. Why does basis risk occur?
66. Which of the following measures the dollar value of futures contracts that should be sold per dollar of cash
position exposure?
67. How is a hedge ratio commonly determined?
68. When will the estimated hedge ratio be greater than one?
69. The current price of June $100,000 T-Bonds trading on the Chicago Board of Trade is 109.24. What is the
price to be paid if the contract is delivered in June?
70. If a 16-year 12 percent semi-annual $100,000 T-bond, currently yielding 10 percent, is used to deliver
against a 20-year, 8 percent T-bond at 114-16/32, what is the conversion factor? What would the buyer have to
pay the seller?
71. If a 12-year, 6.5 percent semi-annual $100,000 T-bond, currently yielding 4.10 percent, is used to deliver
against a 6-year, 5 percent T-bond at 110-17/32, what is the conversion factor? What would the buyer have to
pay the seller?
72. Historical analysis of recent changes in exchange rates in both the spot and futures markets for a given
currency reveals that spot rates are thirty percent more sensitive than futures prices. Given this information, the
hedge ratio for this currency is
73. The covariance of the change in spot exchange rates and the change in futures exchange rates is 0.6060, and
the variance of the change in futures exchange rates is 0.5050. What is the estimated hedge ratio for this
currency?
74. The covariance of the change in spot exchange rates and the change in futures exchange rates is 0.6606, and
the variance of the change in futures exchange rates is 0.6060. The variance of the change in spot exchange
rates is 0.9090. What is the degree of hedging effectiveness?
75. The notational value of the world-wide credit derivative securities markets stood at _________ trillion as of
June 2009, which compares to _________ trillion as of July 2008.
76. A credit forward is a forward agreement that