Question 1

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 A

Question 2

Which of the following statements is true?

Accepted Answer

A) Draw-down risk is a type of liquidity risk. 
B) Draw-down risk is a type of investment risk. 
C) Draw-down risk is a type of credit risk. 
D) Draw-down risk is a type of economic risk. 
A) Draw-down risk is a type of liquidity risk. 
B) Draw-down risk is a type of investment risk. 
C) Draw-down risk is a type of credit risk. 
D) Draw-down risk is a type of economic risk. A

Question 3

Which of the following are typical off-balance-sheet activities undertaken by Australian banks?

Accepted Answer

A) futures contracts and forward contracts 
B) direct credit substitutes 
C) commitments 
D) All of the listed options are correct. 
A) futures contracts and forward contracts 
B) direct credit substitutes 
C) commitments 
D) All of the listed options are correct. D

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

Assume that a bank's market value of assets is $200, the market value of its contingent assets is $50, the market value of its liabilities is $180 and the market value of its contingent liabilities is $60.What is the value of this bank's net worth?

Accepted Answer

A) $200 + $180 - $50 - $60 = $270 
B) $180 - $200 + $50 + $60 = $90 
C) $200 - $180 + $50 - $60 = $10 
D) $200 - $180 - $50 + $60 = $30 
A) $200 + $180 - $50 - $60 = $270 
B) $180 - $200 + $50 + $60 = $90 
C) $200 - $180 + $50 - $60 = $10 
D) $200 - $180 - $50 + $60 = $30

Question 6

Under an interest rate cap, in return for a fee the seller promises to compensate the buyer should interest rates remain under a certain level.

Accepted Answer

A) True 
 B)False

Question 7

FIs may issue standby letters of credit to cover contingencies that are potentially more severe, less predictable and not necessarily trade related.

Accepted Answer

A) True 
 B)False

Question 8

Discuss four major types of off-balance-sheet activities

Accepted Answer

Loan commitment is contractual commitmen

Question 9

Assume a bank makes a loan commitment to the value of $10 million at a fixed interest rate of 10% per annum for a period of one year.Assume the borrower only uses 50% of the provided funds over the course of the year.If the bank charges a back-end fee of 0.5%, what is the additional revenue the bank would generate?

Accepted Answer

A) None, unless the loan is prepaid early. 
B) $2500 
C) $25 000 
D) $5000 
A) None, unless the loan is prepaid early. 
B) $2500 
C) $25 000 
D) $5000

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

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 12

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

Accepted Answer

A) True 
 B)False

Question 13

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 14

The term 'recourse' refers to the ability to put an asset or loan back to the seller should the:

Accepted Answer

A) asset need to be entirely written off 
B) credit quality of that asset improve 
C) buyer not need the asset any longer 
D) credit quality of that asset deteriorate 
A) asset need to be entirely written off 
B) credit quality of that asset improve 
C) buyer not need the asset any longer 
D) credit quality of that asset deteriorate

Question 15

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 16

A loan commitment agreement is a contractual commitment to lend to a firm a certain maximum amount at given interest rate terms

Accepted Answer

A) True 
 B)False

Question 17

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 18

Which of the following statements is true?

Accepted Answer

A) In general, the relationship between the value of an option and the underlying value of a security is non-linear. 
B) For an out-of-the money call option the price of the underlying security is less than the option's exercise price. 
C) Using the delta method to derive the market value of an option is at best an approximation and to deal with the non-linearity of option payoffs, some analysts consider an option's gamma too. 
D) All of the listed options are correct. 
A) In general, the relationship between the value of an option and the underlying value of a security is non-linear. 
B) For an out-of-the money call option the price of the underlying security is less than the option's exercise price. 
C) Using the delta method to derive the market value of an option is at best an approximation and to deal with the non-linearity of option payoffs, some analysts consider an option's gamma too. 
D) All of the listed options are correct.

Question 19

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 20

A contractual commitment to lend to a firm a certain maximum amount at given interest rate terms is:

Accepted Answer

A) a loan commitment agreement 
B) a credit line 
C) a bond 
D) None of the listed options are correct. 
A) a loan commitment agreement 
B) a credit line 
C) a bond 
D) None of the listed options are correct.

Letters of credit are:

Which of the following statements is true?

Which of the following are typical off-balance-sheet activities undertaken by Australian banks?

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

Assume that a bank's market value of assets is $200, the market value of its contingent assets is $50, the market value of its liabilities is $180 and the market value of its contingent liabilities is $60.What is the value of this bank's net worth?

Under an interest rate cap, in return for a fee the seller promises to compensate the buyer should interest rates remain under a certain level.

FIs may issue standby letters of credit to cover contingencies that are potentially more severe, less predictable and not necessarily trade related.

Discuss four major types of off-balance-sheet activities

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

Off-balance-sheet items are:

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

Which of the following statements is true?

The term 'recourse' refers to the ability to put an asset or loan back to the seller should the:

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

A loan commitment agreement is a contractual commitment to lend to a firm a certain maximum amount at given interest rate terms

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

Which of the following statements is true?

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

A contractual commitment to lend to a firm a certain maximum amount at given interest rate terms is:

Why Are Financial Institutions Special

The Financial Service Industry: Depository Institutions

The Financial Service Industry: Other Financial Institutions

Risks 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

Managing Interest Rate Risk Using Securitisation

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 Risks

Capital Management and Adequacy

Filters

Exam 16: Off-Balance-Sheet Activities

Letters of credit are:

Which of the following statements is true?

Which of the following are typical off-balance-sheet activities undertaken by Australian banks?

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

Assume that a bank's market value of assets is $200, the market value of its contingent assets is $50, the market value of its liabilities is $180 and the market value of its contingent liabilities is $60.What is the value of this bank's net worth?

Under an interest rate cap, in return for a fee the seller promises to compensate the buyer should interest rates remain under a certain level.

FIs may issue standby letters of credit to cover contingencies that are potentially more severe, less predictable and not necessarily trade related.

Discuss four major types of off-balance-sheet activities

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

Off-balance-sheet items are:

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

Which of the following statements is true?

The term 'recourse' refers to the ability to put an asset or loan back to the seller should the:

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

A loan commitment agreement is a contractual commitment to lend to a firm a certain maximum amount at given interest rate terms

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

Which of the following statements is true?

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

A contractual commitment to lend to a firm a certain maximum amount at given interest rate terms is:

Why Are Financial Institutions Special

The Financial Service Industry: Depository Institutions

The Financial Service Industry: Other Financial Institutions

Risks 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

Managing Interest Rate Risk Using Securitisation

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 Risks

Capital Management and Adequacy

Filters