Question 1

In the early 1980s:

Accepted Answer

A)  banks increased their off-balance-sheet activities to avoid regulatory taxes. 
B)  banks decreased their off-balance-sheet activities to avoid regulatory costs. 
C)  banks decreased their off-balance-sheet activities to avoid competition from nonbank banks. 
D)  banks increased their off-balance-sheet activities to avoid competition from nonbank banks. 
A)  banks increased their off-balance-sheet activities to avoid regulatory taxes. 
B)  banks decreased their off-balance-sheet activities to avoid regulatory costs. 
C)  banks decreased their off-balance-sheet activities to avoid competition from nonbank banks. 
D)  banks increased their off-balance-sheet activities to avoid competition from nonbank banks.

Question 2

What is seen as a possible reason behind restricted supply of spot loans to borrowers during a credit crunch?

Accepted Answer

A)  Expansionary monetary policy actions of the Reserve Bank of Australia. 
B)  FI's increased aversion toward lending during tight monetary conditions. 
C)  Low aggregate demand from borrowers to take down loan commitments. 
D)  Decrease in cost of funds. 
A)  Expansionary monetary policy actions of the Reserve Bank of Australia. 
B)  FI's increased aversion toward lending during tight monetary conditions. 
C)  Low aggregate demand from borrowers to take down loan commitments. 
D)  Decrease in cost of funds.

Question 3

Which of the following statements is true?

Accepted Answer

A)  Large increases in the value of the OBS assets can render an FI economically insolvent. 
B)  Large increases in the value of the OBS liabilities will not render an FI economically insolvent as the liabilities are only contingent. 
C)  Large increases in the value of the OBS liabilities will not render an FI economically insolvent as the net worth of the institution will not be affected. 
D)  Large increases in the value of the OBS liabilities can render an FI economically insolvent. 
A)  Large increases in the value of the OBS assets can render an FI economically insolvent. 
B)  Large increases in the value of the OBS liabilities will not render an FI economically insolvent as the liabilities are only contingent. 
C)  Large increases in the value of the OBS liabilities will not render an FI economically insolvent as the net worth of the institution will not be affected. 
D)  Large increases in the value of the OBS liabilities can render an FI economically insolvent.

Question 4

Which of the following statements is true?

Accepted Answer

A)  The delta of an option can be calculated as the option's price divided by the price of the underlying security. 
B)  The delta of an option can be calculated as the change in the option's price divided by the change in the price of the underlying security. 
C)  The delta of an option can be calculated as the price of the underlying security divided by the price of the option. 
D)  The delta of an option can be calculated as the change in the price of the underlying security divided by the change in the price of the option. 
A)  The delta of an option can be calculated as the option's price divided by the price of the underlying security. 
B)  The delta of an option can be calculated as the change in the option's price divided by the change in the price of the underlying security. 
C)  The delta of an option can be calculated as the price of the underlying security divided by the price of the option. 
D)  The delta of an option can be calculated as the change in the price of the underlying security divided by the change in the price of the option.

Question 5

Which of the following is a reason why the default risk of a futures contract is assumed to be less than that of a forward contract?

Accepted Answer

A)  Forward contracts are classified as exotic derivatives. 
B)  Margin requirements on futures. 
C)  More flexibility as the buyer can decide whether or not to exercise the contract at maturity. 
D)  None of the listed options are correct as the default risk of a futures contract is generally considered to be higher than that of a forward contract. 
A)  Forward contracts are classified as exotic derivatives. 
B)  Margin requirements on futures. 
C)  More flexibility as the buyer can decide whether or not to exercise the contract at maturity. 
D)  None of the listed options are correct as the default risk of a futures contract is generally considered to be higher than that of a forward contract.

Question 6

Standby letters of credit can be seen as direct competitors to loan commitments.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following statements is true?

Accepted Answer

A)  When issued trading can expose FIs to future interest rate risk. 
B)  When issued trading can expose FIs to future credit risk. 
C)  When issued trading can expose FIs to future liquidity risk. 
D)  When issued trading can expose FIs to future default risk. 
A)  When issued trading can expose FIs to future interest rate risk. 
B)  When issued trading can expose FIs to future credit risk. 
C)  When issued trading can expose FIs to future liquidity risk. 
D)  When issued trading can expose FIs to future default risk.

Question 8

Which of the following statements is true?

Accepted Answer

A)  In its simplest form, the traditional valuation calculates an FI's net worth as the market value of assets less the market value of liabilities. 
B)  In its simplest form, traditional valuation calculates an FI's net worth as the market value of assets plus the market value of liabilities. 
C)  In its simplest form, traditional valuation calculates an FI's net worth as the market value of liabilities less the market value of assets. 
D)  None of the listed options are correct. 
A)  In its simplest form, the traditional valuation calculates an FI's net worth as the market value of assets less the market value of liabilities. 
B)  In its simplest form, traditional valuation calculates an FI's net worth as the market value of assets plus the market value of liabilities. 
C)  In its simplest form, traditional valuation calculates an FI's net worth as the market value of liabilities less the market value of assets. 
D)  None of the listed options are correct.

Question 9

Contingent assets and liabilities are assets and liabilities off the balance sheet that:

Accepted Answer

A)  produce positive or negative future cash flows for an FI. 
B)  can be used in contingency situations, that is, they serve as a fall-back position. 
C)  potentially can produce positive or negative future cash flows for an FI. 
D)  None of the listed options are correct. 
A)  produce positive or negative future cash flows for an FI. 
B)  can be used in contingency situations, that is, they serve as a fall-back position. 
C)  potentially can produce positive or negative future cash flows for an FI. 
D)  None of the listed options are correct.

Question 10

The delta of an option is always greater than one.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements is true?

Accepted Answer

A)  The vega of an option is a measure of volatility risk. 
B)  The omega of an option is a measure of volatility risk. 
C)  The delta of an option is a measure of volatility risk. 
D)  The alpha of an option is a measure of volatility risk. 
A)  The vega of an option is a measure of volatility risk. 
B)  The omega of an option is a measure of volatility risk. 
C)  The delta of an option is a measure of volatility risk. 
D)  The alpha of an option is a measure of volatility risk.

Question 12

The default risk of a futures contract is less than that of a forward contract.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements is true?

Accepted Answer

A)  Back-end fee is the fee imposed on the used component of a loan commitment. 
B)  Back-end fee is the fee imposed at the beginning of a loan contract. 
C)  Back-end fee is the fee imposed on the unused component of a loan commitment. 
D)  Back-end fee is the fee imposed at the end of a loan contract. 
A)  Back-end fee is the fee imposed on the used component of a loan commitment. 
B)  Back-end fee is the fee imposed at the beginning of a loan contract. 
C)  Back-end fee is the fee imposed on the unused component of a loan commitment. 
D)  Back-end fee is the fee imposed at the end of a loan contract.

Question 14

The delta of an option refers to the change in the value of an:

Accepted Answer

A)  option for a large unit change in the price of the underlying security. 
B)  option for a small unit change in the price of the underlying security. 
C)  underlying security for a small unit change in the price of the option. 
D)  underlying security for a large unit change in the price of the option. 
A)  option for a large unit change in the price of the underlying security. 
B)  option for a small unit change in the price of the underlying security. 
C)  underlying security for a small unit change in the price of the option. 
D)  underlying security for a large unit change in the price of the option.

Question 15

If a future credit crunch occurs, a loan commitment may expose the FI to:

Accepted Answer

A)  credit risk. 
B)  interest rate risk. 
C)  sovereign country risk. 
D)  funding risk. 
A)  credit risk. 
B)  interest rate risk. 
C)  sovereign country risk. 
D)  funding risk.

Question 16

As compared to LCs, SLCs typically are used to cover contingencies that potentially are more severe and which may not be trade related.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements is true?

Accepted Answer

A)  In general, default risk on OTC contracts decreases with the time to maturity of the contract and the fluctuation of underlying prices, interest rates or exchange rates. 
B)  In general, default risk on OTC contracts increases with the time to maturity of the contract and the fluctuation of underlying prices, interest rates or exchange rates. 
C)  In general, default risk on OTC contracts is independent of the time to maturity of the contract and the fluctuation of underlying prices, interest rates or exchange rates. 
D)  OTC contracts are generally free of default risk. 
A)  In general, default risk on OTC contracts decreases with the time to maturity of the contract and the fluctuation of underlying prices, interest rates or exchange rates. 
B)  In general, default risk on OTC contracts increases with the time to maturity of the contract and the fluctuation of underlying prices, interest rates or exchange rates. 
C)  In general, default risk on OTC contracts is independent of the time to maturity of the contract and the fluctuation of underlying prices, interest rates or exchange rates. 
D)  OTC contracts are generally free of default risk.

Question 18

Graphically explain the general set-up of a letter of credit transaction. In this context, explain why letters of credit are important.

Accepted Answer

Suppose the Australian importer sent an

Question 19

Which of the following statements is true?

Accepted Answer

A)  For an in-the-money call option the price of the underlying security is below the option's exercise price. 
B)  For an in-the-money call option the price of the underlying security is equal to the option's exercise price. 
C)  For an in-the-money call option the price of the underlying security exceeds the option's exercise price. 
D)  The answer to the question depends on the type of the call option. 
A)  For an in-the-money call option the price of the underlying security is below the option's exercise price. 
B)  For an in-the-money call option the price of the underlying security is equal to the option's exercise price. 
C)  For an in-the-money call option the price of the underlying security exceeds the option's exercise price. 
D)  The answer to the question depends on the type of the call option.

Question 20

An off-balance sheet asset is an item that:

Accepted Answer

A)  moves on to the asset side of the balance sheet when a contingent event occurs. 
B)  is off the balance sheet as it is not part of the FI's core operations. 
C)  is off the balance sheet as the FI does not wish to reveal its existence. 
D)  is off the balance sheet as it neither has an impact on the risk or profitability of the FI. 
A)  moves on to the asset side of the balance sheet when a contingent event occurs. 
B)  is off the balance sheet as it is not part of the FI's core operations. 
C)  is off the balance sheet as the FI does not wish to reveal its existence. 
D)  is off the balance sheet as it neither has an impact on the risk or profitability of the FI.

In the early 1980s:

What is seen as a possible reason behind restricted supply of spot loans to borrowers during a credit crunch?

Which of the following statements is true?

Which of the following statements is true?

Which of the following is a reason why the default risk of a futures contract is assumed to be less than that of a forward contract?

Standby letters of credit can be seen as direct competitors to loan commitments.

Which of the following statements is true?

Which of the following statements is true?

Contingent assets and liabilities are assets and liabilities off the balance sheet that:

The delta of an option is always greater than one.

Which of the following statements is true?

The default risk of a futures contract is less than that of a forward contract.

Which of the following statements is true?

The delta of an option refers to the change in the value of an:

If a future credit crunch occurs, a loan commitment may expose the FI to:

As compared to LCs, SLCs typically are used to cover contingencies that potentially are more severe and which may not be trade related.

Which of the following statements is true?

Graphically explain the general set-up of a letter of credit transaction. In this context, explain why letters of credit are important.

Which of the following statements is true?

An off-balance sheet asset is an item that:

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

In the early 1980s:

What is seen as a possible reason behind restricted supply of spot loans to borrowers during a credit crunch?

Which of the following statements is true?

Which of the following statements is true?

Which of the following is a reason why the default risk of a futures contract is assumed to be less than that of a forward contract?

Standby letters of credit can be seen as direct competitors to loan commitments.

Which of the following statements is true?

Which of the following statements is true?

Contingent assets and liabilities are assets and liabilities off the balance sheet that:

The delta of an option is always greater than one.

Which of the following statements is true?

The default risk of a futures contract is less than that of a forward contract.

Which of the following statements is true?

The delta of an option refers to the change in the value of an:

If a future credit crunch occurs, a loan commitment may expose the FI to:

As compared to LCs, SLCs typically are used to cover contingencies that potentially are more severe and which may not be trade related.

Which of the following statements is true?

Graphically explain the general set-up of a letter of credit transaction. In this context, explain why letters of credit are important.

Which of the following statements is true?

An off-balance sheet asset is an item that:

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