1. TRUE or FALSE (if false, please indicate why the statement is false in the space below).

_______The margin account administered by the clearing house is marked to market daily, and the clearing house member is required to bring the account back up to the initial margin daily.

_______A stop order is executed at the best available price after there is a bid or offer at the specified price or at a price less favorable than the specified price.

_______A central counterparty (CCP) stands between the two parties in an OTC derivative transaction in much the same way that a clearing house does for exchange-traded contracts. It absorbs the credit risk but requires initial and variation margin from each side.

_______A bank's derivatives transactions with a counterparty are worth $10 million to the bank

and are cleared bilaterally. The counterparty has posted $10 million of cash collateral. The bank therefore does not have any credit exposure.

_______Spot and forward rates are quoted as the number of USD per unit of foreign currency.

_______A perfect hedge is one that completely eliminates the hedger's risk. A perfect hedge does not always lead to a better outcome than an imperfect hedge.

_______Basis risk arises from the hedger's uncertainty as to the difference between the spot price and futures price at the expiration of the hedge.

______Assuming that the corn futures contracts have available delivery months in March, May, July, September, and December. The December futures contract should be used for hedging if the expiration of the hedge is in December.

_______If the minimum-variance hedge ratio is calculated as 1.0, the hedge must be perfect.

_______If there is no basis risk, the minimum variance hedge ratio is always 1.0.

_______Convenience yield measures the extent to which there are benefits obtained from ownership of the physical asset that are not obtained by owners of long futures contracts.

_______When a known future cash outflow in a foreign currency is hedged by a company using a forward contract, there is no foreign exchange risk. When it is hedged using futures contracts, the daily settlement process leaves the company exposed to some risk.

_______The futures price of a stock index should equal to the expected future value of the index.

_______The interest rate with semi-annual compounding is always higher than the equivalent rate with continuous compounding.

_______The 1-year zero rate is R1, and 2-year zero-rate is R2. Assuming R2 > R1 and continuous compounding, the forward rate for the second year has to be greater than both R1 and R2.

_______Fed funds rate is a rate for which collateral is posted.

_______The LIBOR rate is free of credit risk.

_______Bootstrapping involves working from short maturity instruments to longer maturity instruments determining zero rates at each step.

_______When the interest rate increases, the bond price decreases. Therefore, when the coupon rate increases, the bond price decreases as well.

_______Actual/360 day count convention is applicable to corporate bonds in the United States.

_______A trader enters into a long position in one Eurodollar futures contract. The trader gains $150 when the futures price quote increases by 6 basis points.

_______ An ultra T-bond futures contract is one where bonds with maturities greater than 15 years can be delivered.

_______The quoted discount rate on a money market instrument (e.g. T-bills) means the interest rate earned as a percentage of the initial price of the bond.

_______The duration of a bond portfolio equals the weighted average of durations of individual bonds in that portfolio, where weights are proportional to the present value of bond prices.

_______The conversion factor for a bond is approximately the price it would have if all cash flows were discounted at 8% per annum.

_______If a trader wants to use 3-month Eurodollar futures to lock in a rate on $5 million for 6 months, he/she will need 10 contracts in total.