Exam 14: Investment Banking,Insurance,and Other Sources of Fee Income

The buyer of a(n)_________________________ option contract believes that the market price of the underlying security will increase in the future.

If a bank has a positive gap,that is,if it is asset sensitive,the bank can hedge its interest-rate risk by which of the following activities?

Most derivatives (measured by notional value)are traded on organized exchanges.

A financial institution confronted with a negative interest-sensitive gap could avoid unacceptable losses from rising interest rates by covering the gap with a short hedge.

A bank wishes to sell $350 million in new 30-day time deposits next month.Today interest rates are 7 percent.However,in the next month interest rates are expected to rise to 7.75 percent.What is the potential loss in profit for the month from this increase in interest rates? (Use a 360 day year)

A bank will use a short hedge in the futures market to avoid higher borrowing costs or to protect against declining asset values.

What is the objective of a cash flow hedge?

A reverse swap is where the parties exchange the principal payments instead of the interest payments on loans.

When a financial institution offers to sell financial futures contract,it is agreeing to take delivery of certain kinds of securities on a stipulated date at a predetermined price.

The approximate percentage of banks operating in the U.S.who reportedly use derivative contracts for risk reduction is:

Interest rate caps protect the lender from falling interest rates.

A swap where the notional amount accumulates over time is called:

The number of contracts that have been established and not yet offset or exercised is called __________________.

A swap where the notional amount declines over time is called:

Money center banks appear to use option contracts to protect the value of a bond portfolio or to hedge against interest-sensitive or duration gaps.

A financial institution that buys a put option:

A significant limitation to financial futures as an interest-rate hedging device is a special form of risk known as ___________ risk.Which of the following terms correctly completes the statement?

The American Commerce Bank (ACB)lends $1.5 million to Unity International Company for six months.The bank usually changes a rate of LIBOR plus 3 percent to companies with similar credit ratings.However,since the bank's economists are of the view that short-term interest rates may fall in the near future,ACB decided to lend money to Unity at a discounted rate of LIBOR plus 2 percent in return for an interest-rate floor of 4.5 percent.What amount of interest rebate will the bank receive,if LIBOR drops to 1.5 percent from 2.5 percent immediately after lending the amount?

A(n)_________________________ is a contract where a borrower with a lower credit rating enters into an agreement with a borrower with a higher credit rating to exchange interest payments.

The short hedge in financial futures contracts is most likely to be used in situations where a bank would suffer losses due to falling interest rates.