The number of futures contracts that a bank will need in order to fully hedge its overall interest rate risk exposure and protect the net worth depends upon (among other factors):the relative duration of bank assets andthe duration of the underlying security named in the futuresthe price of the futuresAll of the options are correct A financial institution that uses a long hedge is most likely:trying to avoid higher borrowingtrying to avoid declining assettrying to avoid lower than expected yields from loans andtrying to avoid higher borrowing costs or trying to avoid declining asset An advantage of interest rate swap is that:it can help protect from interest rateit can help closely match the maturities of assets andit can help transform actual cash flows to more closely match desired cash flowAll of the options are correct Default risk on bonds can be evaluated by using:financial analysisbond ratingsestimates of potential losses on bondsa and b Risk-based capital rules cause banks to favor:government bondsrevenue bondsall municipal bondsno municipal bonds

Note: Since you have posted multiple independent questions in the same request, we will solve the…

The number of futures contracts that a bank will need in order to fully hedge its overall interest rate risk exposure and protect the net worth depends upon (among other factors): the relative duration of bank assets and the duration of the underlying security named in the futures the price of the futures All of the options are correct

The number of futures contracts that a bank will need in order to fully hedge its overall interest rate risk exposure and protect the net worth depends upon (among other factors): the relative duration of bank assets and the duration of the underlying security named in the futures the price of the futures All of the options are correct

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 3ST

See similar textbooks

Similar questions

What kind of futures hedge would be appropriate in each of the following situations? a. A bank fears that rising deposit interest rates will result in losses on fixed-rate loans? b. A bank holds a large block of floating-rate loans and market interest rates are falling? c. A projected rise in market rates of interest threatens the value of the bank's bond portfolio?
Which of the following is NOT an external method of interest rate risk management? * A. Using an interest rate swap B. Using financial futures C. Using an off-balance-sheet strategy, such as a forward rate agreement D. Having fixed-interest assets financed by fixed-interest liabilities and equity
Quoted interest rates are rates stated in the tenor or contract of a particular security. All of the following are true about quoted rates, except: Nominal rates for both government and corporate issued securities have inflation premiums. The liquidity risk premium is used to compensate investors for the possibility of difficulty in converting the security into cash The short-term government securities do not possess any liquidity risk All long-term securities, regardless of the issuing entity, possess risk of changes in prices reflected in the presence of default risk premium
Sorry this is a long question, this is all part of this question... The process of bond valuation is based on the fundamental concept that the current price of a security can be determined by calculating the present value of the cash flows that the security will generate in the future. There is a consistent and predictable relationship between a bond’s coupon rate, its par value, a bondholder’s required return, and the bond’s resulting intrinsic value. Trading at a discount, trading at a premium, and trading at par refer to particular relationships between a bond’s intrinsic value and its par value. This also results from the relationship between a bond’s coupon rate and a bondholder’s required rate of return. Remember, a bond’s coupon rate partially determines the interest-based return that a bond (might/will) pay, and a bondholder’s required return reflects the return that a bondholder (Is obligated/Would like) to receive from a given investment. The mathematics of…
What kind of interest rate swap would a commercial bank with a negative re-pricing gap (that is, rate sensitive assets is less than rate sensitive liabilities) utilize to hedge interest rate risk exposure (that is, would the commercial bank enter into an interest rate swap to make floating rate payments and receive fixed rate payments)?
Which of the following statements correctly describes the relationship between a long-term bond’s market value, its coupon rate and the relevant yield to maturity? Group of answer choices A) More than one of the other statements are correct B) None of the other statements are correct C) A government bond with a fixed coupon rate may be valued below its’ face value even though the promised cash flows are effectively riskless. D) If at any point in the bond’s life its coupon rate is less than the market determined yield to maturity, its market value at that time will be less than the face value of the bond. E) When bonds are initially issued, the coupon rate is generally set equal to the required yield to maturity so that the company can issue the bonds at their face value.
Interest rate risk is of great concern to financial institutions and is often material tothe management and performance of an institution. Your Director has requested youto write brief notes on the following techniques of managing interest rate risk:I. Forward Rate Agreements II. Futures III. Swap IV. Option
Explain how does a bond par value differs from its market value? Are variable rate bonds attractive to investors who expect the interest rates to decrease? Explain. Would a firm that needs to borrow funds consider issuing variable rate bonds if it expects interest rates to decrease in the future? Explain.
bank manager wants to protect the bank against losses that would be incurred on its portfolio of Treasury securities should interest rates rise, he could financial futures. If a Not yet options on answered Points out of 1 Select one: PFlag question A. sell put B. sell call C. buy put D.buy call
Which of the following best describes the Bid-Ask spread in the financial markets? The profit margin a trader expects to make on a sale. The difference between the interest rates of two different currencies. The difference between the price at which one can buy a security (ask) and the price at which one can sell it (bid). The amount by which a bond's yield increases due to an increase in risk.
If a bank manager wants to protect the bank against losses that would be incurred on its portfolio of Treasury securities should interest rates rise, he could financial futures. A. sell put B. sell call C. buy put D.buy call
Which one of the following statements about the term structure of interest rates is true? A) The expectations hypothesis predicts a flat yield curve if anticipated future short-term rates exceed current short-term rates. B) The liquidity premium theory contends that lenders prefer to buy securities at the ghort-term end of the curve. C) The expectations hypothesis contends that the long-term spot rate is equal to the short-term rate. D) The liquidity premium theory indicates that, all else being equal, longer maturity bonds will have lower yields.