Question：The abolition of barriers to entry in the various sectors of the financial services industries has led to the creation of financial conglomerates with operations in banking, securities and insurance. Which of the following is not an effect of this convergence?
A. The reduction of volatility of earnings
B. The reduction of consumers significant search costs
C. The stabilisation of interest rates
D. The creation of economies of scale
The correct answer is: The stabilisation of interest rates.
The stabilisation of interest rates is a characteristic of an Economic and Monetary Union (and is one of the arguments in favour of joining the EMU).
Question：Dab Investments Co wants to secure minimum earnings on deposits of $15 million it will be making in four months' time (mid-December) for an investment period of three months (to mid-March). Which of the following would be suitable methods of hedging the exposure to a fall in interest rates over the next four months?
A. Buying December short dollar futures.
B. Selling December short dollar futures.
C. Selling a 4 v 7 FRA.
D. Buying a 3 v 7 FRA.
E. Buying a call option on September short dollar futures.
The correct answers are:
Selling a 4 v 7 FRA; and
Buying December short dollar futures.
The exposure to a fall in short-term interest rates can be obtained by selling a 4 v 7 FRA, buying December futures or buying a call option on December futures. Dealing in September futures or options does not provide sufficient cover against the interest rate exposure.
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