Exam 14: Off-Balance Sheet Activities

For the purpose of calculating legal lending limits, SLCs are considered:

Small banks tend to dominate the over-the-counter market for derivatives securities.

When a bank sells loan-backed securities with recourse, it has made an off-balance-sheet commitment.

Price risk in a swap agreement means that interest rates or exchange rates may change and have an adverse effect on one or more of the participants in the swap agreement.

Derivative securities are normally used by banks to take risks that were previously not possible, as opposed to using them for decreasing risk.

A coupon swap involves the exchange of interest payments on two different floating rates of interest.

Using the interest rate futures market to "convert" a floating rate loan to a fixed rate loan is called a(n):

A currency swap involves the exchange of principal amounts on two different value dates and no exchange of interest payments between those dates.

Inadequate internal controls, valuation risk, and regulatory risk are all components of:

NIF stands for note insurance fund.

An OTC option that combines ceiling and floor mechanics is called a(n):

Initially, interest rate volatility was the motivation for the growth of loan commitments in the banking industry.

SLCs issued by banks require them to pay the beneficiary if the account party defaults on a financial obligation or performance contract.

In the OTC derivatives market, most of the activity is dominated by:

A contingent claim is the underlying security in a derivative security.

The major advantage of forward rate agreements over exchange traded futures contracts is:

Which of the following is NOT a risk associated with swaps:

Counterparty credit risk is the risk that the counterparty will default on the financial transaction.

To implement a ceiling rate on a loan, the firm borrowing the funds should buy an interest rate call option.

The derivative security that accounts for most of the activity in the OTC market is: