FIN 306 RISK AND RETURN 2026 FINANCE MODULE QUESTIONS ANSWERS PROFESSIONAL SUMMARY

FIN 306 RISK AND RETURN 2026 FINANCE
MODULE QUESTIONS ANSWERS
PROFESSIONAL SUMMARY

◉ forward contract
Answer: agreement to transact involving the future exchange of a set
amount of assets at a set price


-future (spot) price or interest rate on an asset is uncertain
-Often involve underlying assets that are nonstandardized
-canceling the deal prior to expiration is generally difficult.


◉ Long hedge
Answer: Buy
will produce a profit if interest rates fall (since the underlying bonds
increase in value)


◉ Short hedge
Answer: Sell
will produce a profit when interest rates rise (since the underlying
bonds decrease in value).

, ◉ Macrohedging
Answer: Hedging the entire duration gap of an FI


◉ If the FI's duration gap is positive
Answer: the FI manager would want to protect against interest rate
increases


use a short forward


◉ If the FI's duration gap is negative
Answer: FI manager would want to protect against interest rate
declines


use a long forward


◉ Buying a call option
Answer: right to BUY underlying asset in the future


◉ Writing a call option
Answer: selling (short) a call option


◉ Buying a put option