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| 1 | |
A/an ___________contract is an agreement to for immediate exchange of funds for assets. |
| | A) | futures |
| | B) | forward |
| | C) | call option |
| | D) | spot |
| | E) | put option |
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| 2 | |
A/an ___________ contract gives its owner the right to sell some specified asset. |
| | A) | futures |
| | B) | forward |
| | C) | call option |
| | D) | spot |
| | E) | put option |
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| 3 | |
A _________________ is marked to market daily. |
| | A) | fixed rate loan |
| | B) | futures contract |
| | C) | spot contract |
| | D) | forward contract |
| | E) | naive hedge |
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| 4 | |
A/an ___________ contract gives its owner the right to buy some specified asset. |
| | A) | futures |
| | B) | forward |
| | C) | call option |
| | D) | spot |
| | E) | put option |
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| 5 | |
The seller of a put option would also be called the: |
| | A) | writer |
| | B) | futures buyer |
| | C) | "long" party |
| | D) | caller |
| | E) | option owner |
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| 6 | |
Bank-Two owns a portfolio of bonds, but wants to hedge its position. Which of the following would make the most sense? |
| | A) | Buy call options on bonds |
| | B) | Buy futures contracts on bonds |
| | C) | Sell futures contracts on bonds |
| | D) | Sell put options on bonds |
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| 7 | |
If we hedge our bond holdings by using a bond futures contract, there may well be _______ risk remaining, because our bond values will not be perfectly correlated with values of the bonds deliverable on the futures contract. |
| | A) | macro |
| | B) | basis risk |
| | C) | counterparty |
| | D) | micro |
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| 8 | |
If you write call options on bonds, then you: |
| | A) | gain if bond prices fall |
| | B) | lose if bond prices fall |
| | C) | gain if bond prices rise |
| | D) | neither gain or lose, no matter what happens to bond prices |
| | E) | (b) and (c) |
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| 9 | |
Edison Investments is holding a portfolio of 20-year maturity bonds, with a current market value of $18 million. The yield to maturity on the portfolio is currently 9%. The duration of the portfolio is 8.50. If market yields should fall by one percentage point, what will happen to the bond portfolio's value? |
| | A) | increase by $1.53 million |
| | B) | decrease by $1.53 million |
| | C) | increase by $0.085 million |
| | D) | increase by $1.404 million |
| | E) | decrease by $8.295 million |
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| 10 | |
A futures contract is most similar to which of the following? |
| | A) | forward contract |
| | B) | spot contract |
| | C) | call option |
| | D) | put option |
| | E) | basis contract |
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| 11 | |
If an institution is protected against an adverse movement of interest rates, we would say that it: |
| | A) | has maximized profit |
| | B) | has maximized the value of its stockholders |
| | C) | has speculated optimally |
| | D) | is optimized |
| | E) | is immunized |
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| 12 | |
American Bank sells Eurodollar futures contracts. Later, the Eurodollar futures price has increased. Then: |
| | A) | American experienced a loss on its futures contract. |
| | B) | American experienced a gain on its futures contract. |
| | C) | Delivery of the Eurodollars must occur immediately. |
| | D) | The Eurodollar futures price will now have to fall. |
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| 13 | |
Albert holds 15-year maturity bonds, with total face value of $100,000. He's concerned about interest rate risk, so he sells a bond futures contract, which requires delivery of bonds with face value of $100,000. Albert now has: |
| | A) | actually increased his interest rate risk. |
| | B) | a combined position that will surely lose money if interest rates increase. |
| | C) | engaged in a naïve hedge. |
| | D) | (a) and (b) |
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| 14 | |
Buying a "floor": |
| | A) | would not be part of a risk-reducing strategy |
| | B) | is similar to buying a futures contract on interest rates |
| | C) | is similar to buying a call option on interest rates |
| | D) | is similar to relying solely on "spot" market activities |
| | E) | is similar to buying a put option on interest rates |
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| 15 | |
Swaps and forward contracts are ______________, negotiated directly by the counterparties to the agreement. |
| | A) | spot contracts |
| | B) | devoid of all default risk |
| | C) | over-the-counter contracts |
| | D) | standardized agreements offered by an exchange |
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| 16 | |
A financial institution would generally be interested in buying an interest rate "cap" if it is exposed to losses associated with a/an: |
| | A) | increase in credit risk |
| | B) | increase in interest rates |
| | C) | decrease in inflation |
| | D) | decrease in interest rates |
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| 17 | |
Consider balance sheet positions of two banks:
(Dollar figures are in millions)
| Assets | Liabilities | | Bank A $50 in 10-yr. loans @ fixed at 9% | $50 million in 3-month CDs, @ 4% | | Bank B $50 in loans, floating @ LIBOR + 1% | $50 million in 10-yr. notes, fixed @ 5% |
Looking forward, if market interest rates are rising, we expect which of the following? |
| | A) | Interest receipts from A's loans will be increasing. |
| | B) | Interest expenses from A's CD funding will be increasing. |
| | C) | Interest receipts from B's loans will be increasing. |
| | D) | Interest expenses from B's note funding will be decreasing. |
| | E) | (b) and (c) |
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| 18 | |
Consider balance sheet positions of two banks:
(Dollar figures are in millions)
| Assets | Liabilities | | Bank A $50 in 10-yr. loans @ fixed at 9% | $50 million in 3-month CDs, @ 4% | | Bank B $50 in loans, floating @ LIBOR + 1% | $50 million in 10-yr. notes, fixed @ 5% |
Based just on the given information, Bank A appears to have: |
| | A) | a zero duration, for its assets |
| | B) | a zero "duration gap" |
| | C) | a negative "duration gap" |
| | D) | a positive "duration gap" |
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| 19 | |
Consider balance sheet positions of two banks:
(Dollar figures are in millions)
| Assets | Liabilities | | Bank A $50 in 10-yr. loans @ fixed at 9% | $50 million in 3-month CDs, @ 4% | | Bank B $50 in loans, floating @ LIBOR + 1% | $50 million in 10-yr. notes, fixed @ 5% |
Let's assume that both banks want to reduce interest rate risk. What kind of "swap" would help achieve this goal? |
| | A) | Bank A makes a fixed rate payment to Bank B, in return for a floating rate payment. |
| | B) | Bank A makes a fixed rate payment to Bank B, in return for a fixed rate payment. |
| | C) | Bank A makes a floating rate payment to Bank B, in return for a fixed rate payment. |
| | D) | Bank A makes a floating rate payment to Bank B, in return for a floating rate payment. |
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