45
45
45
45. You have taken a short position in a futures contract on corn at $2.60 per bushel. Over the
next 5 days the contract settled at 2.52, 2.57, 2.62, 2.68, 2.70. You then decide to reverse your
position in the futures market on the fifth day at close. What is the net amount you receive at
the end of 5 days?
A. $0.00
B. $2.60
C. $2.70
D. $2.80
E. Must know the number of contracts
Contract nets to you the original price. The net position is based on daily marking to the
market. The net change is $- .10, Close - Change = $2.70 -$10 = $2.60
46. You have taken a short position in a futures contract on corn at $2.60 per bushel. Over the
next 5 days the contract settled at 2.52, 2.57, 2.62, 2.68, 2.70. Before you can reverse your
position in the futures market on the fifth day you are notified to complete delivery. What will
you receive on delivery and what is the net amount you receive in total?
A. $2.60; $-0.10
B. $2.60; $0.10
C. $2.60; $2.70
D. $2.70; $-0.10
E. $2.70; $2.60
Delivery is made at the settle price of $2.70. The net position is based on daily marking to the
market. The difference of -.10 = (.08 + -.05 + -.05 + -.06 + - .02), which is a loss versus the
last settle price.
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Chapter 25 - Derivatives and Hedging Risk
47. You bought a futures contract for $2.60 per bushel and the contract ended at $2.70 after
several days of trading with the following close prices each day: $2.52, $2.57, $2.62, $2.68,
and $2.70. What would the mark to market sequence be?
A. -.08, .05, .05, .06, .02
B. .08, -.05, -.05, -.06, -.02
C. .08, .03, -.02, -.06, -.10
D. -.08, -.03, .02, .06, .10
E. .10, .06, .02, -.03, -.08
48. Suppose you agree to purchase one ounce of gold for $382 any time over the next month.
The current price of gold is $380. The spot price of gold then falls to $377 the next day. If the
agreement is represented by a futures contract marking to market on a daily basis as the price
changes, what is your cash flow at the end of the next business day?
A. $0
B. $3
C. $5
D. $-3
E. $-5
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Chapter 25 - Derivatives and Hedging Risk
49. On March 1, you contract to take delivery of 1 ounce of gold for $415. The agreement is
good for any day up to April 1. Throughout March, the price of gold hit a low of $385 and hit
a high of $435. The price settled on March 31 at $420, and on April 1st you settle your futures
agreement at that price. Your net cash flow is:
A. $-30.
B. $-20.
C. $-15.
D. $5.
E. $20.
50. A bank has a $50 million mortgage bond risk position which it hedges in the Treasury
bond futures markets at the Chicago Board of Trade. Approximately how many contracts are
needed to be held in the hedge?
A. 5
B. 50
C. 500
D. 5,000
E. 50,000
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Chapter 25 - Derivatives and Hedging Risk
51. A mortgage banker had made loan commitments for $10 million in 3 months. How many
contracts on Treasury bonds futures must the banker write or buy?
A. Go short 10.
B. Go short 100.
C. Go long 10.
D. Go long 100.
E. None of the above.
52. The duration of a 2 year annual 10% bond that is selling for par is:
A. 1.00 years.
B. 1.91 years.
C. 2.00 years.
D. 2.09 years.
E. None of the above.
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Chapter 25 - Derivatives and Hedging Risk
53. Firm A is paying $750,000 in interest payments a year while Firm B is paying LIBOR
plus 75 basis points on $10,000,000 loans. The current LIBOR rate is 6.5%. Firm A and B
have agreed to swap interest payments. What is the net payment this year?
A. Firm A pays $750,000 to Firm B
B. Firm B pays $725,000 to Firm A
C. Firm B pays $25,000 to Firm A
D. Firm A pays $25,000 to Firm B
E. None of the above.
Firm A pays a fixed payment of $750,000 to B in exchange for the floating payment of (.065
+ .0075) 10,000,000 = 725,000. The net position is that Firm A pays $25,000 to Firm B.
54. A Treasury note with a maturity of 2 years pays interest semi-annually on a 9 percent
annual coupon rate. The $1,000 face value is returned at maturity. If the effective annual yield
for all maturities is 7 percent annually, what is the current price of the Treasury note?
A. $960.68
B. $986.69
C. $1,010.35
D. $1,034.40
E. $1,038.99
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Chapter 25 - Derivatives and Hedging Risk
55. Calculate the duration of a 7-year $1,000 zero-coupon bond with a current price of
$399.63 and a yield to maturity of 14%.
A. 5 years
B. 6 years
C. 7 years
D. 8 years
E. 9 years
56. Calculate the duration of a 4-year $1,000 face value bond, which pays 8% coupons
annually throughout maturity and has a yield to maturity of 9%.
A. 3.29 years
B. 3.57 years
C. 3.69 years
D. 3.89 years
E. 4.00 years
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Chapter 25 - Derivatives and Hedging Risk
57. On March 1, you contract to take delivery of 1 ounce of gold for $495. The agreement is
good for any day up to April 1. Throughout March, the price of gold hit a low of $425 and hit
a high of $535. The price settled on March 31 at $505, and on April 1st you settle your futures
agreement at that price. Your net cash flow is:
A. $-30.
B. $-20.
C. $-15.
D. $10.
E. $20.
58. A bank has a $80 million mortgage bond risk position which it hedges in the Treasury
bond futures markets at the Chicago Board of Trade. Approximately how many contracts are
needed to be held in the hedge?
A. 5
B. 80
C. 800
D. 8,000
E. 80,000
Essay Questions
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Chapter 25 - Derivatives and Hedging Risk
59. Calculate the duration of Tiger State Bank's assets and liabilities.
Topic: DURATION
Type: ESSAYS
60. What new asset duration will immunize the balance sheet?
Topic: DURATION
Type: ESSAYS
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Chapter 25 - Derivatives and Hedging Risk
61. Duration is defined as the weighted average time to maturity of a financial instrument.
Explain how this knowledge can help protect against interest rate risk.
Duration measures effective time to recoup your investment. Bond prices rise and fall with
interest rate changes. There are two elements of risk. The first being reinvestment risk--may
earn less $ when reinvesting, and the second being price. The value of the bond moves
inversely with interest rates. By setting duration equal to holding horizon, reinvestment and
price risk offset each other. By setting duration of assets equal to duration of liabilities, both
move up and down together.
Topic: DURATION
Type: ESSAYS
62. The futures markets are labeled as pure speculation and even gambling. Why is this an
inaccurate portrayal of the market's function?
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