Question 1

The vega of an option measures:

Accepted Answer

A)  interest rate risk. 
B)  volatility risk. 
C)  off-balance sheet risk. 
D)  price elasticity. 
A)  interest rate risk. 
B)  volatility risk. 
C)  off-balance sheet risk. 
D)  price elasticity.

Question 2

Off-balance-sheet items are:

Accepted Answer

A)  items omitted from the short form balance sheet. 
B)  contingent assets and liabilities. 
C)  exceptionally risky assets and liabilities. 
D)  foreign (off shore) assets and liabilities. 
A)  items omitted from the short form balance sheet. 
B)  contingent assets and liabilities. 
C)  exceptionally risky assets and liabilities. 
D)  foreign (off shore) assets and liabilities.

Question 3

Which of the following statements is true?

Accepted Answer

A)  The measure used to measure the change in delta as the underlying security price varies is called vega. 
B)  The measure used to measure the change in delta as the underlying security price varies is called alpha. 
C)  The measure used to measure the change in delta as the underlying security price varies is called beta. 
D)  None of the listed options are correct. 
A)  The measure used to measure the change in delta as the underlying security price varies is called vega. 
B)  The measure used to measure the change in delta as the underlying security price varies is called alpha. 
C)  The measure used to measure the change in delta as the underlying security price varies is called beta. 
D)  None of the listed options are correct.

Question 4

Which of the following is true of an 'adverse material change in conditions clause' used in a loan commitment?

Accepted Answer

A)  It allows the FI to cancel or reprice a loan commitment. 
B)  It protects the lender against takedown risk. 
C)  It protects the lender against basis risk. 
D)  Exercise of the clause helps defaulted borrowers. 
A)  It allows the FI to cancel or reprice a loan commitment. 
B)  It protects the lender against takedown risk. 
C)  It protects the lender against basis risk. 
D)  Exercise of the clause helps defaulted borrowers.

Question 5

Which of the following statements is true?

Accepted Answer

A)  A forward contract is a standardised contract between two parties to deliver and pay for an asset in the future. 
B)  A forward contract is a non-standardised contract between two parties to deliver and pay for an asset in the future. 
C)  A forward contract is a standardised contract guaranteed by organised exchanges to deliver and pay for an asset in the future. 
D)  A forward contract is a non-standardised contract guaranteed by organised exchanges to deliver and pay for an asset in the future. 
A)  A forward contract is a standardised contract between two parties to deliver and pay for an asset in the future. 
B)  A forward contract is a non-standardised contract between two parties to deliver and pay for an asset in the future. 
C)  A forward contract is a standardised contract guaranteed by organised exchanges to deliver and pay for an asset in the future. 
D)  A forward contract is a non-standardised contract guaranteed by organised exchanges to deliver and pay for an asset in the future.

Question 6

The change in the value of an option for a small unit change in the price of the underlying security is called the:

Accepted Answer

A)  alpha of an option. 
B)  gamma of an option. 
C)  beta of an option. 
D)  delta of an option. 
A)  alpha of an option. 
B)  gamma of an option. 
C)  beta of an option. 
D)  delta of an option.

Question 7

Off-balance sheet activities contributed to the 2008 global financial crisis with increasing financial market solvency risk exposure caused by:

Accepted Answer

A)  loans sold with recourse had contingent liability implications for FIs when these loans went 'bad'. 
B)  sub-prime mortgages and OBS securities backed by these mortgages peaked prior to the mortgage market collapse. 
C)  the market for derivatives was opaque and 'trades' complex leading to counterparty risk where firms dealt directly with each other 
D)  All of the listed options are correct. 
A)  loans sold with recourse had contingent liability implications for FIs when these loans went 'bad'. 
B)  sub-prime mortgages and OBS securities backed by these mortgages peaked prior to the mortgage market collapse. 
C)  the market for derivatives was opaque and 'trades' complex leading to counterparty risk where firms dealt directly with each other 
D)  All of the listed options are correct.

Question 8

Conceptually, a swap contract can be viewed as a succession of forward contracts.

Accepted Answer

A) True 
 B)False

Question 9

Letters of credit are:

Accepted Answer

A)  contingent guarantees sold by an FI to underwrite the trade or commercial performance of the buyer of the guarantee. 
B)  another word for cheques. 
C)  guarantees bought by an FI because they are convinced by the issuer's commercial performance. 
D)  reminders sent by FIs to customers who have outstanding debit balances. 
A)  contingent guarantees sold by an FI to underwrite the trade or commercial performance of the buyer of the guarantee. 
B)  another word for cheques. 
C)  guarantees bought by an FI because they are convinced by the issuer's commercial performance. 
D)  reminders sent by FIs to customers who have outstanding debit balances.

Question 10

Which of the following situation is similar to the externality effect?

Accepted Answer

A)  Exercising an adverse material change in conditions clause as a last resort, thereby cancelling or repricing a loan commitment. 
B)  Increase in the cost of funds above normal levels while many FIs scramble for funds to meet their commitments to customers during a credit crunch. 
C)  In a loan commitment, the borrower takes down only part of the funds over the specified time-period. 
D)  The buyer of a commercial letter of credit fails to perform as promised under a contractual obligation. 
A)  Exercising an adverse material change in conditions clause as a last resort, thereby cancelling or repricing a loan commitment. 
B)  Increase in the cost of funds above normal levels while many FIs scramble for funds to meet their commitments to customers during a credit crunch. 
C)  In a loan commitment, the borrower takes down only part of the funds over the specified time-period. 
D)  The buyer of a commercial letter of credit fails to perform as promised under a contractual obligation.

Question 11

Settlement in case of 'when issued' (WI) trading must be completed on:

Accepted Answer

A)  the date on which the counterparties agree. 
B)  Tuesday. 
C)  Wednesday. 
D)  Thursday. 
A)  the date on which the counterparties agree. 
B)  Tuesday. 
C)  Wednesday. 
D)  Thursday.

Question 12

Explain how the use of forward and future contracts creates contingent credit risk for an FI.

Accepted Answer

Contingent credit risk is likely to be p

Question 13

Which of the following are correct about off-balance sheet activities?

Accepted Answer

A)  They provide a key source of interest income for many FIs. 
B)  By hedging against on-balance-sheet interest rate, FX and credit risks, OBS derivative instruments actually reduce FI overall insolvency risk. 
C)  Higher regulatory costs on derivative instruments may cause FIs to over-hedge resulting in a decrease in FI insolvency risk. 
D)  All of the listed options are correct. 
A)  They provide a key source of interest income for many FIs. 
B)  By hedging against on-balance-sheet interest rate, FX and credit risks, OBS derivative instruments actually reduce FI overall insolvency risk. 
C)  Higher regulatory costs on derivative instruments may cause FIs to over-hedge resulting in a decrease in FI insolvency risk. 
D)  All of the listed options are correct.

Question 14

Redraw facilities are included in the category 'commitments and other non-market related items'.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is true?

Accepted Answer

A)  An FI that issues a documentary letter of credit to one of its customers implicitly believes that the customer's credit standing is not sufficiently high enough to engage in international transactions. 
B)  An FI that issues a documentary letter of credit to one of its customers implicitly assumes the borrower's credit risk. 
C)  An FI that issues a documentary letter of credit to one of its customers has created a contingent asset. 
D)  None of the listed options are correct. 
A)  An FI that issues a documentary letter of credit to one of its customers implicitly believes that the customer's credit standing is not sufficiently high enough to engage in international transactions. 
B)  An FI that issues a documentary letter of credit to one of its customers implicitly assumes the borrower's credit risk. 
C)  An FI that issues a documentary letter of credit to one of its customers has created a contingent asset. 
D)  None of the listed options are correct.

Question 16

Basis risk refers to the variable spread between a lending rate and a borrowing rate, or between any two interest rates or prices

Accepted Answer

A) True 
 B)False

Question 17

Which of the following are included in commitments and non-market related items?

Accepted Answer

A)  direct credit substitutes and trade performance related items 
B)  swaps and options. 
C)  future contracts. 
D)  None of the listed options are correct. 
A)  direct credit substitutes and trade performance related items 
B)  swaps and options. 
C)  future contracts. 
D)  None of the listed options are correct.

Question 18

Which of the following statements is true?

Accepted Answer

A)  The variable spread between a lending rate and a borrowing rate, or between any two interest rates or prices is called basis risk. 
B)  The variable spread between a lending rate and a borrowing rate, or between any two interest rates or prices is called spread risk. 
C)  The variable spread between a lending rate and a borrowing rate, or between any two interest rates or prices is called interest spread risk. 
D)  The variable spread between a lending rate and a borrowing rate, or between any two interest rates or prices is called funding risk. 
A)  The variable spread between a lending rate and a borrowing rate, or between any two interest rates or prices is called basis risk. 
B)  The variable spread between a lending rate and a borrowing rate, or between any two interest rates or prices is called spread risk. 
C)  The variable spread between a lending rate and a borrowing rate, or between any two interest rates or prices is called interest spread risk. 
D)  The variable spread between a lending rate and a borrowing rate, or between any two interest rates or prices is called funding risk.

Question 19

Which of the following statements is true?

Accepted Answer

A)  Economically speaking, contingent assets and liabilities are contractual claims that might or might not impact on the economic value of a bank. 
B)  Economically speaking, contingent assets and liabilities are contractual claims that do not impact on the economic value of a bank. 
C)  Economically speaking, contingent assets and liabilities are contractual claims that directly impact on the economic value of a bank. 
D)  Economically speaking, contingent assets and liabilities are contractual claims that indirectly impact on the economic value of a bank. 
A)  Economically speaking, contingent assets and liabilities are contractual claims that might or might not impact on the economic value of a bank. 
B)  Economically speaking, contingent assets and liabilities are contractual claims that do not impact on the economic value of a bank. 
C)  Economically speaking, contingent assets and liabilities are contractual claims that directly impact on the economic value of a bank. 
D)  Economically speaking, contingent assets and liabilities are contractual claims that indirectly impact on the economic value of a bank.

Question 20

Which of the following is an out-of-the-money counterparty?

Accepted Answer

A)  Counterparty in a loan commitment contract. 
B)  FI that trades in securities prior to their actual issue. 
C)  Counterparty that is currently at an advantage in terms of cash flows. 
D)  Counterparty that is currently at a disadvantage in terms of cash flows 
A)  Counterparty in a loan commitment contract. 
B)  FI that trades in securities prior to their actual issue. 
C)  Counterparty that is currently at an advantage in terms of cash flows. 
D)  Counterparty that is currently at a disadvantage in terms of cash flows

The vega of an option measures:

Off-balance-sheet items are:

Which of the following statements is true?

Which of the following is true of an 'adverse material change in conditions clause' used in a loan commitment?

Which of the following statements is true?

The change in the value of an option for a small unit change in the price of the underlying security is called the:

Off-balance sheet activities contributed to the 2008 global financial crisis with increasing financial market solvency risk exposure caused by:

Conceptually, a swap contract can be viewed as a succession of forward contracts.

Letters of credit are:

Which of the following situation is similar to the externality effect?

Settlement in case of 'when issued' (WI) trading must be completed on:

Explain how the use of forward and future contracts creates contingent credit risk for an FI.

Which of the following are correct about off-balance sheet activities?

Redraw facilities are included in the category 'commitments and other non-market related items'.

Which of the following statements is true?

Basis risk refers to the variable spread between a lending rate and a borrowing rate, or between any two interest rates or prices

Which of the following are included in commitments and non-market related items?

Which of the following statements is true?

Which of the following statements is true?

Which of the following is an out-of-the-money counterparty?

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off Balance Sheet Instruments

Credit Risk I: Individual Loan Risk

Market Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Technology and Other Operational Risk

Capital Management and Adequacy

Filters

Exam 16: Off-Balance-Sheet Activities

The vega of an option measures:

Off-balance-sheet items are:

Which of the following statements is true?

Which of the following is true of an 'adverse material change in conditions clause' used in a loan commitment?

Which of the following statements is true?

The change in the value of an option for a small unit change in the price of the underlying security is called the:

Off-balance sheet activities contributed to the 2008 global financial crisis with increasing financial market solvency risk exposure caused by:

Conceptually, a swap contract can be viewed as a succession of forward contracts.

Letters of credit are:

Which of the following situation is similar to the externality effect?

Settlement in case of 'when issued' (WI) trading must be completed on:

Explain how the use of forward and future contracts creates contingent credit risk for an FI.

Which of the following are correct about off-balance sheet activities?

Redraw facilities are included in the category 'commitments and other non-market related items'.

Which of the following statements is true?

Basis risk refers to the variable spread between a lending rate and a borrowing rate, or between any two interest rates or prices

Which of the following are included in commitments and non-market related items?

Which of the following statements is true?

Which of the following statements is true?

Which of the following is an out-of-the-money counterparty?

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off Balance Sheet Instruments

Credit Risk I: Individual Loan Risk

Market Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Technology and Other Operational Risk

Capital Management and Adequacy

Filters