Chapter 13 Questions and Answers

Describe the general characteristics of a future contract. How does a clearinghouse facilitate the trading of financial futures contracts? 2. How does the price of a financial futures contract change as the market price of the security it represents changes? Why? 3. Explain why some futures contracts may be more suitable than others for hedging exposure to interest rate risk.

4.Will speculators buy or sell Treasury bind futures contracts if they expect interest rates to increase? Why? 7. Financial assets- Would it be more like to be adversely affected by an increase or a decrease in interest rates? Should it purchase or sell interest rate futures contracts in order to hedge its exposure? 8. Financial liabilities- Would it be more likely to be adversely affected by an increase or a decrease in interest rates? Should it purchase or sell interest rate futures contracts in order to hedge its exposure? 9.Why do some financial institutions remain exposed to interest rate risk, even when they believe that the use of interest rate futures could reduce their exposure? 10. Explain the difference between a long hedge and a short hedge used by financial institutions. When is a long hedge more appropriate than a short hedge? 11.

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Explain how the probability distribution of a financial institution’s returns is affected when it use interest rates futures to hedge. What does this imply about its risk? 12. Describe the act of cross-hedging, what determines the effectiveness of a cross-hedge?