xiv Contents Questions 344 Quantitative Problems 344 Web Exercises 345 CHAPTER 14 Risk Management with Financial Derivatives 346 Learning Objectives 346 Preview 346 Hedging 346 Forward Contracts and Markets 347 Interest-Rate Forward Contracts 347 Application Hedging with Interest-Rate Forward Contracts 347 Pros and Cons of Forward Contracts 348 Financial Futures Contracts and Markets 349 Interest-Rate Futures Contracts 349 FYI The Montreal Exchange and the Canadian Derivatives Clearing Corporation (CDCC) 349 SWAPS 370 Interest-Rate Swap Contracts 371 Application Hedging with Interest-Rate Swaps 371 Advantages of Interest-Rate Swaps 372 Disadvantages of Interest-Rate Swaps 373 Financial Intermediaries in Interest-Rate Swaps 373 Credit Derivatives 374 Credit Options 374 Credit Swaps 374 Credit-Linked Notes 375 Application Lessons from the Subprime Financial Crisis: When Are Financial Derivatives Likely to Be a Worldwide Time Bomb? 375 Summary Key Terms Questions Quantitative Problems Web Exercises 377 377 378 378 379 Financial News Interest-Rate Futures 350 Application Hedging with Interest-Rate Futures 352 Organization of Trading in Financial Futures Markets 353 The Globalization of Financial Futures Markets 353 Explaining the Success of Futures Markets 355 PA RT V Central Banking and the FYI The Hunt Brothers and the Silver Crash 356 Central Banks and the Bank of Canada 381 Learning Objectives 381 Preview 381 Origins of the Bank of Canada 381 Application Hedging Foreign Exchange Risk 357 Stock Index Futures 358 FYI ProgramTrading and Portfolio Insurance: WereThey to Blame for the Stock Market Crash of 1987? 359 Stock Index Futures Contracts 359 Financial News Stock Index Futures 360 Application Hedging with Stock Index Futures 361 Options 361 Stock Options 362 Futures Options 365 Application Hedging with Futures Options 368 Factors Affecting the Prices of Option Premiums 369 Summary 370 Conduct of Monetary Policy 380 Crisis and Response: The Bank of Canada s Monetary Policy and Liquidity Provision During the Financial Crisis 380 CHAPTER 15 Global Establishment of Selected Central Banks 382 Formal Structure of the Bank of Canada 383 The Functions of the Bank of Canada 383 Inside the Central Bank The Political Environment and the Bank of Canada 383 Bank Note Issue 384 Government Debt and Asset Management Services 384 Central Banking Services 384 Monetary Policy 385 Inside the Central Bank Role of the Bank s Research Staff 386 How Independent Is the Bank of Canada? 386