Question 1

The delta of an option is always greater than one.

Accepted Answer

A) True 
 B)False

Question 2

Basis risk arises because loan rates and deposit rates are not perfectly correlated in their movements over time

Accepted Answer

A) True 
 B)False

Question 3

Contingent guarantees sold by an FI to underwrite a trade or commercial performance of the buyer of the guarantee are:

Accepted Answer

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

Question 4

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

Accepted Answer

A) True 
 B)False

Question 5

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

Question 6

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 7

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 8

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 9

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) FIs' increased aversion towards 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) FIs' increased aversion towards lending during tight monetary conditions. 
C) Low aggregate demand from borrowers to take down loan commitments. 
D) Decrease in cost of funds.

Question 10

Documentary letters of credit are contingent guarantees sold by an FI to underwrite a trade or commercial performance of the buyer of the guarantee

Accepted Answer

A) True 
 B)False

Question 11

An exporter demands a letter of credit in order to:

Accepted Answer

A) guarantee safe delivery of goods to the importer 
B) guarantee receipt of payment from the importer upon receipt of the goods 
C) protect against adverse changes in foreign exchange rates 
D) ascertain the creditworthiness of the importer 
A) guarantee safe delivery of goods to the importer 
B) guarantee receipt of payment from the importer upon receipt of the goods 
C) protect against adverse changes in foreign exchange rates 
D) ascertain the creditworthiness of the importer

Question 12

Takedown or draw-down risk in a loan commitment exposes the FI to:

Accepted Answer

A) immediate liquidity risk 
B) basis and spread risk 
C) externality effects 
D) future liquidity risk 
A) immediate liquidity risk 
B) basis and spread risk 
C) externality effects 
D) future liquidity risk

Question 13

Which of the following statements is true?

Accepted Answer

A) Basis risk arises because loan rates and deposit rates are not perfectly correlated in their movements over time 
B) Basis risk arises because loan rates and deposit rates are perfectly correlated in their movements over time 
C) Basis risk arises because loan rates and deposit rates always move in the same direction over time 
D) FIs are not subject to the basis risk 
A) Basis risk arises because loan rates and deposit rates are not perfectly correlated in their movements over time 
B) Basis risk arises because loan rates and deposit rates are perfectly correlated in their movements over time 
C) Basis risk arises because loan rates and deposit rates always move in the same direction over time 
D) FIs are not subject to the basis risk

Question 14

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 15

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 16

The 'face value of an OBS item' is also referred to as the notional value.

Accepted Answer

A) True 
 B)False

Question 17

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 18

Assume a bank has bought a call option on bonds with a notional value of $200.Further assume that and that the delta of the option is calculated at 0.45.What is the contingent asset value (round to two decimals)?

Accepted Answer

A) $200 / 0.45 = $444.44 
B) $200 * 0.45 = $90.00 
C) ($200 / 0.45) / 100 = $4.44 
D) ($200 * 0.45) / 100 = $0.90 
A) $200 / 0.45 = $444.44 
B) $200 * 0.45 = $90.00 
C) ($200 / 0.45) / 100 = $4.44 
D) ($200 * 0.45) / 100 = $0.90

Question 19

The current market value of an off-balance-sheet item is determined by finding the current market value of the underlying item.

Accepted Answer

A) True 
 B)False

Question 20

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.

The delta of an option is always greater than one.

Basis risk arises because loan rates and deposit rates are not perfectly correlated in their movements over time

Contingent guarantees sold by an FI to underwrite a trade or commercial performance of the buyer of the guarantee are:

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

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

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

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

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

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

Documentary letters of credit are contingent guarantees sold by an FI to underwrite a trade or commercial performance of the buyer of the guarantee

An exporter demands a letter of credit in order to:

Takedown or draw-down risk in a loan commitment exposes the FI to:

Which of the following statements is true?

Which of the following statements is true?

Which of the following statements is true?

The 'face value of an OBS item' is also referred to as the notional value.

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

Assume a bank has bought a call option on bonds with a notional value of $200.Further assume that and that the delta of the option is calculated at 0.45.What is the contingent asset value (round to two decimals)?

The current market value of an off-balance-sheet item is determined by finding the current market value of the underlying item.

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?

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

The delta of an option is always greater than one.

Basis risk arises because loan rates and deposit rates are not perfectly correlated in their movements over time

Contingent guarantees sold by an FI to underwrite a trade or commercial performance of the buyer of the guarantee are:

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

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

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

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

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

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

Documentary letters of credit are contingent guarantees sold by an FI to underwrite a trade or commercial performance of the buyer of the guarantee

An exporter demands a letter of credit in order to:

Takedown or draw-down risk in a loan commitment exposes the FI to:

Which of the following statements is true?

Which of the following statements is true?

Which of the following statements is true?

The 'face value of an OBS item' is also referred to as the notional value.

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

Assume a bank has bought a call option on bonds with a notional value of $200.Further assume that and that the delta of the option is calculated at 0.45.What is the contingent asset value (round to two decimals)?

The current market value of an off-balance-sheet item is determined by finding the current market value of the underlying item.

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?

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