• University of Saskatchewan

• COMM 469

COMM 469 Quiz 4

Chapter 22

42. A forward contract 


A. has more credit risk than a futures contract.


B. is more standardized than a futures contract.


C. is marked to market more frequently than a futures contract.


D. has a shorter time to delivery than a futures contract.


E. is less risky than a futures contract.

51. A naive hedge occurs when 


A. an FI manager wishes to use futures or other derivative securities to hedge the entire balance

sheet duration gap.


B. a cash asset is hedged on a direct dollar-for-dollar basis with a forward or futures contract.


C. an FI reduces its interest rate or other risk exposure to the lowest possible level by selling

sufficient futures to offset the interest rate risk exposure of its whole balance sheet.


D. an FI purchases an insurance cover to the extent of 80% of losses arising from adverse

movement in asset prices.


E. All of these.

55. Which of the following indicates the need to place a hedge? 


A. The price movement in the underlying cash asset cannot be forecasted perfectly.


B. The prices of the assets or liabilities are imperfectly correlated over time with the prices on

the futures.


C. Basis risk prevents the minimum risk of the portfolio from reaching zero.


D. Treasury has been issuing more shorter-dated bonds to finance U.S. budget deficits.


E. Spot bonds and futures on bonds are traded in different markets.

57. 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 


A. microhedging.


B. selective hedging.


C. routine hedging.


D. overhedging.


E. speculation.

Chapter 23

68. As interest rates increase, the buyer of a bond put option stands to 


A. make limited gains.


B. incur limited losses.


C. incur unlimited losses.


D. lose the entire premium amount.


E. make limited gains and lose the entire premium account.

71. What is the advantage of an options hedge over a futures hedge? 


A. The options hedge has lower credit risk exposure.


B. The options hedge has lower transaction costs.


C. The options hedge is marked to market less frequently.


D. The options hedge offers the most downside risk protection.


E. The options hedge offers the most upside gain potential.

73. The combination of being long in the bond and buying a put option on a bond mimics the

profit function of 


A. buying a put option.


B. writing a put option.


C. writing a call option.


D. buying a call option.


E. buying a floor