MBA 621 FINAL | 2025-2026 LATEST UPDATE | COMPREHENSIVE QUESTIONS WITH 100%
RATED ANSWERS | GUARANTEED TO PASS
Valuation of Financial Futures The price of a financial futures contract generally reflects the
expected price of the underlying security as of the settlement date
As the market price of the financial asset changes, so will the value of the contract
Factors that influence the expected price of the asset influence the futures' price:
The current price of the asset
Economic or market conditions
Impact of the opportunity cost
Investors who buy stock index futures instead of the stock index do not receive any dividends
Investors who buy stock index futures put up a much smaller investment
Speculating with Interest Rate Futures Involves trading T-bill futures
The position taken depends on interest rate expectations
If interest rates are expected to decline, purchase T-bill futures
If interest rates are expected to increase, sell T-bill futures
The maximum possible loss when purchasing futures is the amount to be paid for the securities
Closing Out the Futures Position Rather than making or accepting delivery, most buyers and
sellers take offsetting positions to close out the futures contract
,e.g., speculators who purchased T-bond futures contracts would sell similar futures contracts by
the settlement date
If the futures price has risen over the holding period, speculators who purchased interest rate
futures will realize a positive gain
Only about 2 percent of all futures contracts actually involve delivery
Hedging with Interest Rate Futures The difference between a financial institution's volume
of rate-sensitive assets and rate-sensitive liabilities represents its exposure to interest rate risk
In the long run, the institution could restructure its assets or liabilities
In the short run, the institution could use financial futures to hedge its exposure to interest rate
movements
Using interest rate futures to create a short hedge If an institution has more rate-sensitive
liabilities than assets, it will be adversely affected by rising interest rates
The institution could sell futures on securities with similar characteristics than its assets
If interest rates rise, the loss on the rate-sensitive assets will be offset by the gain on the short
futures position
Tradeoff from using a short hedge Interest rate futures can hedge against both adverse and
favorable events
The probability distribution of returns is narrower with hedging than without hedging
Institutions that frequently use interest rate futures may be able to reduce the variability of
their earnings over time
, Cross-hedging Cross-hedging is the use of a futures contract on one financial instrument to
hedge a position in a different financial instrument
The effectiveness depends on the degree of correlation between the market values of the two
financial instruments
e.g., a short position in Treasury bond futures to hedge interest rate risk of a portfolio of
corporate bonds
Even with a high correlation, the value of the futures contract may change by a higher or lower
percentage than the portfolio's market value
stock index futures contract A stock index futures contract allows for the buying and selling
of a stock index for a specified price at a specified date
Available for various stock indexes (see next slide)
Have four settlement dates on the third Friday in March, June, September, and December
The securities underlying the stock index futures are not deliverable; settlement occurs through
a cash payment
The net gain or loss is the difference between the futures price when the initial position was
created and the value of the contract on the settlement date
Some speculators prefer to trade stock index futures rather than actual stocks because of the
smaller transaction costs
Valuing stock index futures contracts The value of a stock index futures contract is highly
correlated with the value of the underlying stock index
The value of a stock index futures contract commonly varies from the value of the underlying
index
RATED ANSWERS | GUARANTEED TO PASS
Valuation of Financial Futures The price of a financial futures contract generally reflects the
expected price of the underlying security as of the settlement date
As the market price of the financial asset changes, so will the value of the contract
Factors that influence the expected price of the asset influence the futures' price:
The current price of the asset
Economic or market conditions
Impact of the opportunity cost
Investors who buy stock index futures instead of the stock index do not receive any dividends
Investors who buy stock index futures put up a much smaller investment
Speculating with Interest Rate Futures Involves trading T-bill futures
The position taken depends on interest rate expectations
If interest rates are expected to decline, purchase T-bill futures
If interest rates are expected to increase, sell T-bill futures
The maximum possible loss when purchasing futures is the amount to be paid for the securities
Closing Out the Futures Position Rather than making or accepting delivery, most buyers and
sellers take offsetting positions to close out the futures contract
,e.g., speculators who purchased T-bond futures contracts would sell similar futures contracts by
the settlement date
If the futures price has risen over the holding period, speculators who purchased interest rate
futures will realize a positive gain
Only about 2 percent of all futures contracts actually involve delivery
Hedging with Interest Rate Futures The difference between a financial institution's volume
of rate-sensitive assets and rate-sensitive liabilities represents its exposure to interest rate risk
In the long run, the institution could restructure its assets or liabilities
In the short run, the institution could use financial futures to hedge its exposure to interest rate
movements
Using interest rate futures to create a short hedge If an institution has more rate-sensitive
liabilities than assets, it will be adversely affected by rising interest rates
The institution could sell futures on securities with similar characteristics than its assets
If interest rates rise, the loss on the rate-sensitive assets will be offset by the gain on the short
futures position
Tradeoff from using a short hedge Interest rate futures can hedge against both adverse and
favorable events
The probability distribution of returns is narrower with hedging than without hedging
Institutions that frequently use interest rate futures may be able to reduce the variability of
their earnings over time
, Cross-hedging Cross-hedging is the use of a futures contract on one financial instrument to
hedge a position in a different financial instrument
The effectiveness depends on the degree of correlation between the market values of the two
financial instruments
e.g., a short position in Treasury bond futures to hedge interest rate risk of a portfolio of
corporate bonds
Even with a high correlation, the value of the futures contract may change by a higher or lower
percentage than the portfolio's market value
stock index futures contract A stock index futures contract allows for the buying and selling
of a stock index for a specified price at a specified date
Available for various stock indexes (see next slide)
Have four settlement dates on the third Friday in March, June, September, and December
The securities underlying the stock index futures are not deliverable; settlement occurs through
a cash payment
The net gain or loss is the difference between the futures price when the initial position was
created and the value of the contract on the settlement date
Some speculators prefer to trade stock index futures rather than actual stocks because of the
smaller transaction costs
Valuing stock index futures contracts The value of a stock index futures contract is highly
correlated with the value of the underlying stock index
The value of a stock index futures contract commonly varies from the value of the underlying
index
