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Chapter

Chapter. 8. Using Financial Futures and Options in Bank Asset-Liability Management. The purpose of this chapter is to examine how financial futures contracts can be employed to help reduce a bank’s potential exposure to loss due to changing interest rates and other forces in the economy.

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Chapter

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  1. Chapter 8 Using Financial Futures and Options in Bank Asset-Liability Management The purpose of this chapter is to examine how financial futures contracts can be employed to help reduce a bank’s potential exposure to loss due to changing interest rates and other forces in the economy.

  2. Financial Futures Contract An Agreement Between a Buyer and a Seller Which Calls for the Delivery of a Particular Financial Asset at a Set Price at Some Future Date

  3. The Purpose of Financial Futures To Shift the Risk of Interest Rate Fluctuations from Risk-Averse Investors to Speculators

  4. Chicago Board of Trade (CBOT) Financial Exchange (FINEX) New York Futures Exchange (NYFE) Marche a Terme International De France (MATIF) Singapore Exchange LTD. (SGX) Chicago Mercantile Exchange (CME) London International Financial Futures Exchange (LIFFE) Sydney Futures Exchange Toronto Futures Exchange (TFE) The World’s Leading Futures and Option Exchanges

  5. Most Common Financial Futures Contracts • U.S. Treasury Bond Futures Contracts • U.S. Treasury Bill Futures Contracts • Three-Month Eurodollar Time Deposit Futures Contract • 30-Day Federal Funds Futures Contracts • One Month LIBOR Futures Contracts

  6. Hedging with Futures Contracts

  7. Basis Risk Cash-Market Price (or Interest Rate) Less the Futures-Market Price (or Interest Rate)

  8. Realized Return from Combining Cash and Futures Market Trading = Return Earned in the Cash Market +/- Profit or Loss from Futures Trading • Closing Basis Between Cash and Futures Market • Opening Basis Between Cash and Futures Market

  9. Number of Futures Contracts Needed

  10. Interest Rate Option It Grants the Holder of the option the Right but Not the Obligation to Buy or Sell Specific Financial Instruments at an Agreed Upon Price.

  11. Types of Options • Put Option • Gives the Holder of the Option the Right to Sell the Financial Instrument at a Set Price • Call Option • Gives the Holder of the Option the Right to Purchase the Financial Instrument at a Set Price

  12. Most Common Option Contracts Used By Banks • U.S. Treasury Bill Futures Options • Eurodollar Futures Option • U.S. Treasury Bond Option • LIBOR Futures Option

  13. Principal Uses of Option Contracts • Protection of the Bond Portfolio • Hedging Against Positive or Negative Gap Positions

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