Online Access Free 8006 Practice Test

The effectiveness of a hedge is determined by which of the following expressions, where x,y is the correlation between the asset being hedged and the hedge position:
A)

B)

C)

D)

• A.Option A
• B.Option C
• C.Option B
• D.Option D

The effectiveness of a hedge is determined by:

• A.the correlation and standard deviation of the hedge asset
• B.the alpha coefficient of the linear regression between the asset being hedged and the hedge
• C.the correlation between the asset being hedged and the asset being used as a hedge
• D.the beta coefficient of the linear regression between the asset being hedged and the hedge

The yield offered by a bond with 18 months remaining to maturity is 5%. The coupon is 3%, paid semi-annually, and there are two more coupon payments to go in addition to the interest payment made at maturity. The zero rate for 6 months is 2%, that for 12 months is 3%. What is the 18 month zero rate?

• A.4.81%
• B.6.03%
• C.5.03%
• D.4.03

A large utility wishes to issue a fixed rate bond to finance its plant and equipment purchases. However, it finds it difficult to find investors to do so. But there is investor interest in a floating rate note of the same maturity.
Because its revenues and net income tend to vary only predictably year to year, the utility desires a fixed rate liability. Which of the following will allow the utility to achieve its objectives?

• A.Issue a floating rate note and hedge the risk of movements in interest rates by entering into an interest rate swap to pay fixed and receive floating
• B.Buy a floating rate note and hedge the risk of movements in interest rates by entering into an interest rate swap to pay fixed and receive floating
• C.Issue a floating rate note and immediately buy a similar floating rate note, together with a long position in interest rate futures
• D.Issue a floating rate note and hedge the risk of movements in interest rates by entering into an interest rate swap to pay floating and receive fixed

A bond manager holding $1m long in a bond portfolio is concerned that interest rates might rise over the next three months. Which of the following represents the best hedging strategy for the manager?

• A.Buy bond futures so that the notional value of the futures contracts matches that of the bonds he holds
• B.Sell bond futures so that the dollar duration of the futures contracts matches that of the bonds he holds
• C.Sell bond futures so that the notional value of the futures contracts matches that of the bonds he holds
• D.Sell bond futures so that the market value of the futures contracts matches that of the bonds he holds