Determine the optimal hedge ratio for Treasury bonds worth $1,000,000 with a duration of 12.45, yielding 11.9 percent if the futures has a price of $90,000, a duration of 8.5 years and an implied yield of 9.5 percent.

a. 16.27

b. 16.63

c. 7.42

d. 11.11

e. none of the above

which of the following is the interpretation of a VAR of $5 million for one year at .05.

a. the probability is .05 that the firm will lose at least $5 million in one year

b. the probability is at least .05 that the firm will lose $5 million in one year

c. the probability is .05 that the firm will lose $5 million in one year

d. the probability is less than .05 that the firm will lose $5 million in one year none of the above

25. Which of the following are not methods of determining the VAR?

a. simulation method

b. historical method

c. estimation method

d. analytical method

e. none of the above

Consider a swap to pay currency A floating and receive currency B floating. What type of swap would be combined with this swap to produce a swap to produce a plain vanilla Interest rate swap (pay fixed and receive floating) in currency B.

a. pay currency B floating, receive currency A fixed

b. pay currency B fixed, receive currency A floating

c. pay currency B fixed, receive currency A fixed

d. pay currency B floating, receive currency A floating

e. none of the above

Each of the following is a benefit of practicing risk management by companies except

investment opportunities

1. companies can manage risk better than their shareholders

2. risk management can avoid bankruptcy costs

3. risk management can lower taxes

4. risk management can increase employment opportunities

5. risk management can help prevent companies from passing up valuable

33. Find the approximate upcoming net payment on an equity swap in which party A pays the return on stock index 1 and party B pays the return on stock index 2. The notional principal is $25 million. Stock index 1 starts the period at 1500 and goes up to 1600 at the end of the period. Stock index 2 starts the period at 3500 and goes up to 3300 at the end of the period.

    1. The party paying index 1 pays about $238,000

    2. The party paying index 2 pays about $238,000

    3. The party paying index 2 pays about $3.095 million

    4. The party paying index 1 pays about $25 million

    5. The party paying index 1 pays about $3.095 million

33. The advantage of a collar over a cap is

    1. it offers the possibility of greater returns

    2. it lowers the out-of-pocket cost

    3. it eliminates the risk

    4. it has lower transaction costs