Question 1

Which of the following results in a net liquidity drain?

Accepted Answer

A)  Demand deposits increase $120; loans increase $80 
B)  Reverse repurchase agreements increase $50; demand deposit decrease $50 
C)  Repurchase agreements increase $100; Demand deposit decrease $50 
D)  Demand deposits decrease $120; loan repayments are $250 
E)  Demand deposits increase $10; loans decrease $10 
A)  Demand deposits increase $120; loans increase $80 
B)  Reverse repurchase agreements increase $50; demand deposit decrease $50 
C)  Repurchase agreements increase $100; Demand deposit decrease $50 
D)  Demand deposits decrease $120; loan repayments are $250 
E)  Demand deposits increase $10; loans decrease $10

Question 2

Refer to the information below for questions 
Formosa Independence Bank has the following balance sheet:
  
-The bank's one-year gap between assets and liabilities is (Mill $)

Accepted Answer

A)  $425 
B)  $245 
C)  $174 
D)  $140 
E)  $126 
A)  $425 
B)  $245 
C)  $174 
D)  $140 
E)  $126

Question 3

Although caps, floors, and collars can be created by buying and selling options on financial futures, this strategy is difficult because

Accepted Answer

A)  exchange-traded options with sufficiently long maturities may not exist, or are illiquid, or are too expensive. 
B)  these strategies limit the options of banks who use them. 
C)  regulators prefer swaps to options. 
D)  they can be used to hedge the $GAP, but not the duration gap. 
A)  exchange-traded options with sufficiently long maturities may not exist, or are illiquid, or are too expensive. 
B)  these strategies limit the options of banks who use them. 
C)  regulators prefer swaps to options. 
D)  they can be used to hedge the $GAP, but not the duration gap.

Question 4

Which one of the following alternatives is an appropriate way to deal with deposit withdrawals that utilizes asset management of liquidity?

Accepted Answer

A)  Purchasing T-bonds 
B)  Contacting an investment banker to find new corporate deposits 
C)  Increasing Fed funds borrowed 
D)  Issuance of a negotiable CD 
E)  Selling the bank's holdings of T-bills 
A)  Purchasing T-bonds 
B)  Contacting an investment banker to find new corporate deposits 
C)  Increasing Fed funds borrowed 
D)  Issuance of a negotiable CD 
E)  Selling the bank's holdings of T-bills

Question 5

Negotiable certificates of deposit (CDs), federal funds, repurchase agreements, commercial paper, and Eurodollar borrowings are called

Accepted Answer

A)  noninterest bearing liabilities 
B)  hot money 
C)  primary reserves 
D)  secondary reserves 
E)  core deposits 
A)  noninterest bearing liabilities 
B)  hot money 
C)  primary reserves 
D)  secondary reserves 
E)  core deposits

Question 6

Suppose that the mean change in the Treasury bill yield over the next month is 0 basis points with a standard deviation of 0.50. The duration for the Treasury bills is 6 months or 0.50 years and the bank holds $10,000,000 in Treasury bills The Treasury bills have an APR of 7.0 (3.5% for six months) . Based on this information, what is the VaR with a 99% confidence level?

Accepted Answer

A)  $ 39,731 
B)  $ 56,192 
C)  $ 79,462 
D)  $112,384 
A)  $ 39,731 
B)  $ 56,192 
C)  $ 79,462 
D)  $112,384

Question 7

Refer to the information below for questions 
XYZ Bank has DA = 2.4 years and DL = 0.9 years. The bank has total equity of $82 million and total assets of $850 million. Currently, interest rates are at 6%.
-What is the bank's duration gap in years?

Accepted Answer

A)  1.432 
B)  1.488 
C)  1.587 
D)  1.656 
E)  1.722 
A)  1.432 
B)  1.488 
C)  1.587 
D)  1.656 
E)  1.722

Question 8

A ______ eliminates the effects of extreme movements in interest rates, allowing the bank's cash flows to fluctuate within a specified range.

Accepted Answer

A)  Cap 
B)  Floor 
C)  Sleeve 
D)  Collar 
E)  Straddle 
A)  Cap 
B)  Floor 
C)  Sleeve 
D)  Collar 
E)  Straddle

Question 9

Macrohedging is the use of risk-management instruments such as futures and options to reduce the interest rate risk of the overall bank portfolio.

Accepted Answer

A) True 
 B)False

Question 10

Short‐term assets that can be converted quickly into cash at a price near their purchase price that are held to provide both liquidity and a safe return are called

Accepted Answer

A)  primary reserves. 
B)  secondary reserves. 
C)  tertiary reserves 
D)  Federal reserves 
A)  primary reserves. 
B)  secondary reserves. 
C)  tertiary reserves 
D)  Federal reserves

Question 11

The simplest form of hedging interest rate risk is matched funding of loans..

Accepted Answer

A) True 
 B)False

Question 12

For a given time period, assets that mature within the period or reprice within the period are considered rate sensitive.

Accepted Answer

A) True 
 B)False

Question 13

A bank's primary reserves include

Accepted Answer

A)  vault cash, reverse repurchase agreements and Fed Funds sold 
B)  Fed funds purchased, reverse repurchase agreements, checkable deposits 
C)  cash on hand, discount window loans and repurchase agreements 
D)  vault cash, deposits at correspondent banks, and deposits held at Federal Reserve banks 
E)  core deposits, brokered CDs and perpetual preferred stock. 
A)  vault cash, reverse repurchase agreements and Fed Funds sold 
B)  Fed funds purchased, reverse repurchase agreements, checkable deposits 
C)  cash on hand, discount window loans and repurchase agreements 
D)  vault cash, deposits at correspondent banks, and deposits held at Federal Reserve banks 
E)  core deposits, brokered CDs and perpetual preferred stock.

Question 14

A difference payment refers to

Accepted Answer

A)  the different notional principal amounts on the two sides of a swap. 
B)  the change in margin account due to daily marking to market on a futures position. 
C)  the amount an option is in the money. 
D)  the net payment amount on a collar. 
E)  the net amount owed on a swap payment date between the swap parties. 
A)  the different notional principal amounts on the two sides of a swap. 
B)  the change in margin account due to daily marking to market on a futures position. 
C)  the amount an option is in the money. 
D)  the net payment amount on a collar. 
E)  the net amount owed on a swap payment date between the swap parties.

Question 15

A bank with a positive dollar gap will have a decrease in net interest income when ______.

Accepted Answer

A)  interest rates increase 
B)  interest rates decrease 
C)  the duration gap also changes 
D)  the incremental gap is negative 
A)  interest rates increase 
B)  interest rates decrease 
C)  the duration gap also changes 
D)  the incremental gap is negative

Question 16

A U.S. company has a euro denominated liability it must repay in 6 months. A short position in euro futures could help offset the corporation's foreign exchange risk.

Accepted Answer

A) True 
 B)False

Question 17

Refer to the information below for questions 
XYZ Bank has DA = 2.4 years and DL = 0.9 years. The bank has total equity of $82 million and total assets of $850 million. Currently, interest rates are at 6%.
-To set the bank's duration gap to zero the bank could

Accepted Answer

A)  Reduce DA to 1.2 years 
B)  Increase DL to 2.656 years 
C)  Increase DL to 2.77 years 
D)  Reduce DA to zero 
E)  Increase DL to 3.10 years 
A)  Reduce DA to 1.2 years 
B)  Increase DL to 2.656 years 
C)  Increase DL to 2.77 years 
D)  Reduce DA to zero 
E)  Increase DL to 3.10 years

Question 18

Suppose a bank has an asset duration of 5 years and a liability duration of 2.5 years. This bank has $1,000 million in assets and $750 million in liabilities. They plan on hedging with a Treasury bond futures contract which has an underlying duration of 8.5 years and which is selling right now for $99,000 for a $100,000 contract. How many futures contracts does this bank need to fully hedge itself against interest rate risk?

Accepted Answer

A)  3,714 contracts 
B)  3,125 contracts 
C)  2,971 contracts 
D)  371 contracts 
E)  37 contacts 
A)  3,714 contracts 
B)  3,125 contracts 
C)  2,971 contracts 
D)  371 contracts 
E)  37 contacts

Question 19

Refer to the information below for questions 
Formosa International Bank (FIB) (mill$)
 $\begin{array}{ll}
\text { Funds borrowed } & \$ 6,300 \
\text { Maximum amount FIB can still borrow } & \$ 8,600 \
\text { Cash-type assets } & \$ 4,700 \
\text { Excess cash reserves } & \$ 100 \
\text { Federal Reserve borrowings } & \$ 200
\end{array}$ 
-What are Formosa International Bank's total current uses of liquidity?

Accepted Answer

A)  $ 6,500 
B)  $14,500 
C)  $14,900 
D)  $16,280 
E)  $15,760 
A)  $ 6,500 
B)  $14,500 
C)  $14,900 
D)  $16,280 
E)  $15,760

Question 20

In a credit default swap, the most a seller of the swap may have to pay is

Accepted Answer

A)  the monthly payment due to the swap buyer. 
B)  the difference payment based on the fixed and variable interest rates on the swap. 
C)  the par value of the insured security. 
D)  the marking to market value of the underlying. 
A)  the monthly payment due to the swap buyer. 
B)  the difference payment based on the fixed and variable interest rates on the swap. 
C)  the par value of the insured security. 
D)  the marking to market value of the underlying.

Which of the following results in a net liquidity drain?

Refer to the information below for questions Formosa Independence Bank has the following balance sheet: -The bank's one-year gap between assets and liabilities is (Mill $)

Although caps, floors, and collars can be created by buying and selling options on financial futures, this strategy is difficult because

Which one of the following alternatives is an appropriate way to deal with deposit withdrawals that utilizes asset management of liquidity?

Negotiable certificates of deposit (CDs), federal funds, repurchase agreements, commercial paper, and Eurodollar borrowings are called

Refer to the information below for questions XYZ Bank has DA = 2.4 years and DL = 0.9 years. The bank has total equity of $82 million and total assets of $850 million. Currently, interest rates are at 6%. -What is the bank's duration gap in years?

A ______ eliminates the effects of extreme movements in interest rates, allowing the bank's cash flows to fluctuate within a specified range.

Macrohedging is the use of risk-management instruments such as futures and options to reduce the interest rate risk of the overall bank portfolio.

Short‐term assets that can be converted quickly into cash at a price near their purchase price that are held to provide both liquidity and a safe return are called

The simplest form of hedging interest rate risk is matched funding of loans..

For a given time period, assets that mature within the period or reprice within the period are considered rate sensitive.

A bank's primary reserves include

A difference payment refers to

A bank with a positive dollar gap will have a decrease in net interest income when ______.

A U.S. company has a euro denominated liability it must repay in 6 months. A short position in euro futures could help offset the corporation's foreign exchange risk.

Refer to the information below for questions XYZ Bank has DA = 2.4 years and DL = 0.9 years. The bank has total equity of $82 million and total assets of $850 million. Currently, interest rates are at 6%. -To set the bank's duration gap to zero the bank could

In a credit default swap, the most a seller of the swap may have to pay is

An Overview of Financial Markets and Institutions

The Federal Reserve and Its Powers

The Fed and Interest Rates

The Level of Interest Rates

Bond Prices and Interest Rate Risk

The Structure of Interest Rates

Money Markets 1

Bond Markets

Mortgage Markets and Mortgagebacked Securities

Equity Markets

Derivatives Markets

International Markets

Commercial Bank Operations

International Banking

Regulation of Financial Institutions

Thrift Institutions and Finance Companies

Insurance Companies and Pension Funds

Investment Banking

Investment Companies

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Exam 20: Risk Management in Financial Institutions

Which of the following results in a net liquidity drain?

Refer to the information below for questions Formosa Independence Bank has the following balance sheet: -The bank's one-year gap between assets and liabilities is (Mill $)

Although caps, floors, and collars can be created by buying and selling options on financial futures, this strategy is difficult because

Which one of the following alternatives is an appropriate way to deal with deposit withdrawals that utilizes asset management of liquidity?

Negotiable certificates of deposit (CDs), federal funds, repurchase agreements, commercial paper, and Eurodollar borrowings are called

Refer to the information below for questions XYZ Bank has DA = 2.4 years and DL = 0.9 years. The bank has total equity of $82 million and total assets of $850 million. Currently, interest rates are at 6%. -What is the bank's duration gap in years?

A ______ eliminates the effects of extreme movements in interest rates, allowing the bank's cash flows to fluctuate within a specified range.

Macrohedging is the use of risk-management instruments such as futures and options to reduce the interest rate risk of the overall bank portfolio.

Short‐term assets that can be converted quickly into cash at a price near their purchase price that are held to provide both liquidity and a safe return are called

The simplest form of hedging interest rate risk is matched funding of loans..

For a given time period, assets that mature within the period or reprice within the period are considered rate sensitive.

A bank's primary reserves include

A difference payment refers to

A bank with a positive dollar gap will have a decrease in net interest income when ______.

A U.S. company has a euro denominated liability it must repay in 6 months. A short position in euro futures could help offset the corporation's foreign exchange risk.

Refer to the information below for questions XYZ Bank has DA = 2.4 years and DL = 0.9 years. The bank has total equity of $82 million and total assets of $850 million. Currently, interest rates are at 6%. -To set the bank's duration gap to zero the bank could

In a credit default swap, the most a seller of the swap may have to pay is

An Overview of Financial Markets and Institutions

The Federal Reserve and Its Powers

The Fed and Interest Rates

The Level of Interest Rates

Bond Prices and Interest Rate Risk

The Structure of Interest Rates

Money Markets 1

Bond Markets

Mortgage Markets and Mortgagebacked Securities

Equity Markets

Derivatives Markets

International Markets

Commercial Bank Operations

International Banking

Regulation of Financial Institutions

Thrift Institutions and Finance Companies

Insurance Companies and Pension Funds

Investment Banking

Investment Companies

Filters