1. Futures Contracts Describe the general charac- teristics of a futures contrac

Question

1.            Futures Contracts Describe the general charac- teristics of a futures contract. How does a clearinghouse facilitate the trading of financial futures contracts?

2.            Futures Pricing How does the price of a financial futures contract change as the market price of the security it represents changes? Why?

3.            Hedging with Futures Explain why some futures contracts may be more suitable than others for hedging exposure to interest rate risk.

4.            Treasury Bond Futures Will speculators buy or sell Treasury bond futures contracts if they expect interest rates to increase? Explain

7.            Hedging with Futures Assume a financial institution has more rate-sensitive assets than rate-sensitive 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?

8.            Hedging with Futures Assume a financial institution has more rate-sensitive liabilities than rate- sensitive assets. 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.            Hedging Decision Why do some financial insti- tutions remain exposed to interest rate risk, even when they believe that the use of interest rate futures could reduce their exposure?

10. Long versus Short Hedge 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. Impact of Futures Hedge Explain how the probability distribution of a financial institution’s returns is affected when it uses interest rate futures to hedge. What does this imply about its risk?

12. Cross-Hedging Describe the act of cross-hedging. What determines the effectiveness of a cross-hedge?

Explanation / Answer

Answer:

Trading of financial futures contracts:

A Futures contract is an agreement between two parties: wheres one party agree to buy the commodity and other agrees to sell it. However there is no actual physical movement of commodity at the time of making agreement. The person who agrees to buy is called having a long position and the other person who agrees to sale is called having s short position. The buyer is secured with the price agreed and the seller hope the price to fall to earn the profit.

In most of the cases the futures contract ends with no physical movement of commodity and a final settlement is done between the parties.

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