Question 1

Loan commitment activities increase the insolvency exposure of FIs that engage in such activities.

Accepted Answer

A) True 
 B)False

Question 2

The amount of regulations that have been proposed because of the increased use of risk-reducing OBS derivatives is increasing.

Accepted Answer

A) True 
 B)False

Question 3

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 4

A $200 million loan commitment has an up-front fee of 20 basis points and a back-end fee of 25 basis points on the unused portion.
-What is the balance sheet capital?

Accepted Answer

A) -$60 million. 
B) $60 million. 
C) $740 million. 
D) $800 million. 
E) This question cannot be answered without information about off-balance sheet assets and liabilities. 
A) -$60 million. 
B) $60 million. 
C) $740 million. 
D) $800 million. 
E) This question cannot be answered without information about off-balance sheet assets and liabilities.

Question 5

Loan commitments are classified as

Accepted Answer

A) on-balance-sheet assets. 
B) off-balance-sheet assets. 
C) off-balance-sheet liabilities. 
D) on-balance-sheet liabilities. 
E) equity capital. 
A) on-balance-sheet assets. 
B) off-balance-sheet assets. 
C) off-balance-sheet liabilities. 
D) on-balance-sheet liabilities. 
E) equity capital.

Question 6

Funds transferred on Fedwire are settled at the end of the day.

Accepted Answer

A) True 
 B)False

Question 7

Interest rate risk is part of the loan commitment contingent risk because of the uncertainty of changes in interest rates before the borrower exercises his option to borrow.

Accepted Answer

A) True 
 B)False

Question 8

If an option's price increases 1.4 percent for every 2 percent change in the price of the underlying security, what is the value of the option's delta?

Accepted Answer

A) 0.60. 
B) 1.40. 
C) 0.70. 
D) 2.00. 
E) 3.00. 
A) 0.60. 
B) 1.40. 
C) 0.70. 
D) 2.00. 
E) 3.00.

Question 9

More FIs fail as a result of credit risk exposures than either interest rate or FX risk exposure.

Accepted Answer

A) True 
 B)False

Question 10

In economic terms, the letters of credit (LCs) and stand-by letters of credit SLCs sold by an FI

Accepted Answer

A) are contractual commitments to make a loan up to a stated amount at a given interest rate in the future. 
B) are insurance against the frequency or severity of some particular future occurrence. 
C) are nonstandard contracts between two parties to deliver and pay for an asset in the future. 
D) are standardized contract guaranteed by organized exchanges to deliver and pay for an asset in the future. 
E) Answers C and D only. 
A) are contractual commitments to make a loan up to a stated amount at a given interest rate in the future. 
B) are insurance against the frequency or severity of some particular future occurrence. 
C) are nonstandard contracts between two parties to deliver and pay for an asset in the future. 
D) are standardized contract guaranteed by organized exchanges to deliver and pay for an asset in the future. 
E) Answers C and D only.

Question 11

The present value of an off-balance-sheet item is its notional value.

Accepted Answer

A) True 
 B)False

Question 12

What is a swap?

Accepted Answer

A) An agreement between two parties to exchange assets or a series of cash flows for a specific period of time at a specified interval. 
B) An agreement between a buyer and a seller at time 0 to exchange a nonstandardized asset for cash at some future date. 
C) A contract that gives the holder the right, but not the obligation to buy or sell the underlying asset at a specified price within a specified period of time. 
D) Trading in securities prior to their actual issue. 
E) Contractual commitment to make a loan up to a stated amount at a given interest rate in the future. 
A) An agreement between two parties to exchange assets or a series of cash flows for a specific period of time at a specified interval. 
B) An agreement between a buyer and a seller at time 0 to exchange a nonstandardized asset for cash at some future date. 
C) A contract that gives the holder the right, but not the obligation to buy or sell the underlying asset at a specified price within a specified period of time. 
D) Trading in securities prior to their actual issue. 
E) Contractual commitment to make a loan up to a stated amount at a given interest rate in the future.

Question 13

The effect to an FI of default by the counterparty to a derivative contract is LEAST serious with

Accepted Answer

A) options contracts. 
B) futures contracts. 
C) swap agreements. 
D) forward contracts. 
E) loan commitments. 
A) options contracts. 
B) futures contracts. 
C) swap agreements. 
D) forward contracts. 
E) loan commitments.

Question 14

Which of the following are contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a pre-specified price for a specified time period?

Accepted Answer

A) Options. 
B) Futures. 
C) Forwards. 
D) Swaps. 
E) All of the above. 
A) Options. 
B) Futures. 
C) Forwards. 
D) Swaps. 
E) All of the above.

Question 15

FIs are competing directly with loan commitments, one of their own OBS products, when they also offer:

Accepted Answer

A) Futures contracts. 
B) Swaps. 
C) Standby letters of credit. 
D) Forward contracts. 
E) When-issued trading. 
A) Futures contracts. 
B) Swaps. 
C) Standby letters of credit. 
D) Forward contracts. 
E) When-issued trading.

Question 16

A $200 million loan commitment has an up-front fee of 20 basis points and a back-end fee of 25 basis points on the unused portion.
-If 50 percent of the commitment is taken down, the back-end fee is

Accepted Answer

A) $250,000. 
B) $4,000,000. 
C) $400,000. 
D) $775,000. 
E) $375,000. 
A) $250,000. 
B) $4,000,000. 
C) $400,000. 
D) $775,000. 
E) $375,000.

Question 17

When-issued trading involves the commitment to buy and sell securities before they are issued.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A) Exercising an adverse material change in conditions clause as a last resort, thereby canceling 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. 
E) All of the above. 
A) Exercising an adverse material change in conditions clause as a last resort, thereby canceling 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. 
E) All of the above.

Question 19

Off-balance sheet activities can have both positive and negative effects on the risk of the FI.

Accepted Answer

A) True 
 B)False

Question 20

A corporation is planning to issue $10 million worth of 180-day commercial paper. In order to reduce the interest rates by 25 basis points (per year), it plans to back this issue with a standby letter of credit or a loan commitment. The standby letter of credit is available for 20 basis points (per year) to be paid up-front. The loan commitment for $10 million is available for an up-front fee of 15 basis points (per year) and a 5 basis points back-end fee.
-What are the savings to the corporation if it obtains a standby letter of credit to back its $10 million issue of commercial paper?

Accepted Answer

A) $1,250. 
B) $2,500. 
C) $3,750. 
D) $5,000. 
E) $6,250. 
A) $1,250. 
B) $2,500. 
C) $3,750. 
D) $5,000. 
E) $6,250.

Exam 16: Off-Balance-Sheet Risk

Loan commitment activities increase the insolvency exposure of FIs that engage in such activities.

The amount of regulations that have been proposed because of the increased use of risk-reducing OBS derivatives is increasing.

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

A $200 million loan commitment has an up-front fee of 20 basis points and a back-end fee of 25 basis points on the unused portion. -What is the balance sheet capital?

Loan commitments are classified as

Funds transferred on Fedwire are settled at the end of the day.

Interest rate risk is part of the loan commitment contingent risk because of the uncertainty of changes in interest rates before the borrower exercises his option to borrow.

If an option's price increases 1.4 percent for every 2 percent change in the price of the underlying security, what is the value of the option's delta?

More FIs fail as a result of credit risk exposures than either interest rate or FX risk exposure.

In economic terms, the letters of credit (LCs) and stand-by letters of credit SLCs sold by an FI

The present value of an off-balance-sheet item is its notional value.

What is a swap?

The effect to an FI of default by the counterparty to a derivative contract is LEAST serious with

Which of the following are contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a pre-specified price for a specified time period?

FIs are competing directly with loan commitments, one of their own OBS products, when they also offer:

A $200 million loan commitment has an up-front fee of 20 basis points and a back-end fee of 25 basis points on the unused portion. -If 50 percent of the commitment is taken down, the back-end fee is

When-issued trading involves the commitment to buy and sell securities before they are issued.

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

Off-balance sheet activities can have both positive and negative effects on the risk of the FI.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Technology and Other Operational Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Swaps

Loan Sales

Securitization

Filters