Final Exam Review - Derivatives

A hedge in which the asset underlying the futures is not the asset being hedged is

a cross hedge

Suppose you buy an asset at $50 and sell a futures contract at $53. What is your profit at expiration if the asset price goes to $49? (Ignore carrying costs)

$3

Which of the following correctly expresses the profit on a hedge?

the change in the basis

Use the following information to answer questions 22 through 24. On October 1, the one-month LIBOR rate is 4.50 percent and the two month LIBOR rate is 5.00 percent. The November Fed funds futures is quoted at 94.50. The contract size is $5,000,000.

What happens to the basis through the contract's life?

it moves toward zero

Use the following information to answer questions 22 through 24. On October 1, the one-month LIBOR rate is 4.50 percent and the two month LIBOR rate is 5.00 percent. The November Fed funds futures is quoted at 94.50. The contract size is $5,000,000.

Find the profit if the investor enters an intramarket spread transaction by selling a September futures at $4.5, buys an December futures at $7.5 and then reverses the September futures at $5.5 and the December futures at $9.5.

1

Use the following information to answer questions 22 through 24. On October 1, the one-month LIBOR rate is 4.50 percent and the two month LIBOR rate is 5.00 percent. The November Fed funds futures is quoted at 94.50. The contract size is $5,000,000.

Quantity risk is

the difficulty in measuring the volatility

The relationship between the spot yield and the yield implied by the futures price is called

the yield beta

All of the following are futures contract choice decisions related to hedging, except

which strike price

The difference between the swap rate and the rate on a Treasury security of the same maturity is called the

swap spread

Interest rate swap payments are made

at whatever dates are agreed upon by the counterparties

To determine the fixed rate on a swap, you would

price it as the issuance of a fixed rate bond and purchase of a floating rate bond or vice versa

Which of the following is not a type of swap?

settlement swaps

The underlying amount of money on which the swap payments are made is called

notional amount

The most basic and common type of swap is called

plain vanilla swap

A short hedge is one in which

the margin requirement is waived

the hedger is short futures

the hedger is short in the spot market

the futures price is lower than the spot price

none of the above

the hedger is short futures

An interest rate swap with both sides paying a floating rate is called a

basis swap

A currency swap without the exchange of notional amount is most likely to be used in what situation?

a company generating cash flows in a foreign currency

Which of the following distinguishes equity swaps from currency swaps?

equity swap payments can be negative

Risk management encompasses all of the following except

determining a firm's actual level of risk

determining a firm's desired level of risk

setting policies and procedures

monitoring your position after-the-fact

none of the above

none of the above

Market risk is which of the following

the risk associated with movements in such factors as interest rates and exchange rates

Which of the following is the interpretation of a VAR of $5 million for one year at 5 percent probability.

the probability is 5 percent that the firm will lose at least $5 million in one year

Which of the following are not methods of determining the VAR?

estimation method

Which of the following methods is not used to reduce credit risk?

delta-gamma-vega hedging

Which of the following are types of risks faced by a derivatives dealer?

tax risk

operational risk

accounting risk

legal risk

none of the above

none of the above

Systemic risk is

the risk of a failure of the entire financial system

Which of the following is the primary impetus for the growth in the practice of risk management?

concern over volatility

A total return swap is best described as

a swap in which the return on one bond is swapped for some other payment

Which of the following forms of hedging requires the use of options?

vega hedging

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