Question 1

In most interest rate swaps,netting reduces the default risk because the parties actually exchange only the difference in the interest payments.

Accepted Answer

A) True 
 B)False

Question 2

A financial institution goes _________________________ in the futures market by selling a futures contract.

Accepted Answer

The answer of A financial institution goes _________________________ in the...

Question 3

A financial institution that sells a particular futures contract and later purchases the same contract back is executing:

Accepted Answer

A) a long hedge. 
B) a short hedge. 
C) a sideways hedge. 
D) an up-side-down hedge. 
E) None of the options are correct

Question 4

A futures contract which calls for the delivery of a $100,000 T-bond with a minimum of 15 years to maturity is called a:

Accepted Answer

A) U.S.Treasury bond futures contract. 
B) One-month LIBOR futures contract. 
C) Eurodollar time deposit futures contract. 
D) Federal Funds futures contract. 
E) None of the options are correct.

Question 5

In an interest rate swap,the ________________________ or principal amount is not exchanged.

Accepted Answer

The answer of In an interest rate swap,the ________________________ or...

Question 6

A hedging tool that provides "one-sided" insurance against interest rate risk is the interest rate option,which,like financial futures contracts,obligates the parties to the contract to either deliver or take delivery of securities.

Accepted Answer

A) True 
 B)False

Question 7

Interest rate hedging devices used by banks today include which of the following?

Accepted Answer

A) Financial futures contracts. 
B) Interest-rate options contracts. 
C) Interest rate swaps. 
D) Interest rate caps,floors,and collars. 
E) All of the options are correct

Question 8

The September T-bond futures contract is currently selling at 111-05 and September call option on T-bond futures for a strike price of 115-00 is currently quoting at 2-24.If an investor purchases one contract of the call option at the current market price and if the T-bond futures contract settles at 118-05 on the expiration day,what will be the net gain/loss for the investor?

Accepted Answer

A) $781.25 
B) $281.25 
C) -$359.38 
D) $791.25 
E) $566.25

Question 9

Which of the following is an advantage of trading financial futures to hedge interest-rate risk?

Accepted Answer

A) Only a fraction of the value of the contract must be pledged as collateral 
B) Brokers' commissions are relatively low 
C) There is no market risk in trading futures contracts 
D) All of the options are correct 
E) Only a fraction of the value of the contract must be pledged as collateral and brokers' commissions are relatively low

Question 10

An interest-rate cap on a loan would protect the lender.

Accepted Answer

A) True 
 B)False

Question 11

Interest rate caps:

Accepted Answer

A) first developed in the 1980s. 
B) protect the borrower from rising interest rates. 
C) allow for the exchange of amounts in different currencies by two parties. 
D) protect the lenders from falling interest rates. 
E) allow for the exchange of amounts in different currencies by two parties and protect the lenders from falling interest rates.

Question 12

Which of the following is a disadvantage of an interest rate swap agreement?

Accepted Answer

A) Basis risk 
B) High brokerage fees 
C) Default risk 
D) Interest rate risk 
E) All of the options are disadvantages of interest rate swap agreements.

Question 13

On the exchange floor,_________ execute orders received from the public to buy and sell the futures contract at the best possible price.

Accepted Answer

The answer of On the exchange floor,_________ execute orders received...

Question 14

Unlike futures contracts,interest rate swap agreements have no basis risk.

Accepted Answer

A) True 
 B)False

Question 15

The _________ is determined by the clearing house and is used to calculate the mark-to-market amounts.

Accepted Answer

The answer of The _________ is determined by the clearing...

Question 16

The most actively traded futures contract in the world is the ________.It is traded on exchanges in Chicago,London,Tokyo,Singapore and elsewhere and allows investors the opportunity to hedge against market interest rate changes.

Accepted Answer

The answer of The most actively traded futures contract in...

Question 17

________ in a swap refers to the risk arising from the difference in the interest rate defined in the terms of a swap and the interest rates of the assets and liabilities held by the parties to swap.

Accepted Answer

A) Default risk 
B) Liquidity risk 
C) Interest rate risk 
D) Basis risk 
E) Transaction risk

Question 18

A bank seeking to avoid lower than expected yields from loans and security investments is most likely to use:

Accepted Answer

A) a short position or selling hedge in futures. 
B) a long position or buying hedge in futures. 
C) a long position in put option on futures contracts. 
D) a long position or buying hedge in futures and a long position in put option on futures contracts. 
E) None of the options are correct.

Question 19

An agreement where a party with a lower credit rating enters into an agreement to exchange interest payments with a borrower having a higher credit rating is known as:

Accepted Answer

A) an interest rate swap. 
B) a currency swap. 
C) a swaption. 
D) a quality swap. 
E) None of the options are correct

Question 20

There are some significant limitations to financial futures as interest-rate hedging devices;among them is a special form of risk known as credit risk.

Accepted Answer

A) True 
 B)False

Exam 14: Investment Banking,Insurance,and Other Sources of Fee Income

In most interest rate swaps,netting reduces the default risk because the parties actually exchange only the difference in the interest payments.

A financial institution goes _________________________ in the futures market by selling a futures contract.

A financial institution that sells a particular futures contract and later purchases the same contract back is executing:

A futures contract which calls for the delivery of a $100,000 T-bond with a minimum of 15 years to maturity is called a:

In an interest rate swap,the ________________________ or principal amount is not exchanged.

A hedging tool that provides "one-sided" insurance against interest rate risk is the interest rate option,which,like financial futures contracts,obligates the parties to the contract to either deliver or take delivery of securities.

Interest rate hedging devices used by banks today include which of the following?

Which of the following is an advantage of trading financial futures to hedge interest-rate risk?

An interest-rate cap on a loan would protect the lender.

Interest rate caps:

Which of the following is a disadvantage of an interest rate swap agreement?

On the exchange floor,_________ execute orders received from the public to buy and sell the futures contract at the best possible price.

Unlike futures contracts,interest rate swap agreements have no basis risk.

The _________ is determined by the clearing house and is used to calculate the mark-to-market amounts.

The most actively traded futures contract in the world is the ________.It is traded on exchanges in Chicago,London,Tokyo,Singapore and elsewhere and allows investors the opportunity to hedge against market interest rate changes.

________ in a swap refers to the risk arising from the difference in the interest rate defined in the terms of a swap and the interest rates of the assets and liabilities held by the parties to swap.

A bank seeking to avoid lower than expected yields from loans and security investments is most likely to use:

An agreement where a party with a lower credit rating enters into an agreement to exchange interest payments with a borrower having a higher credit rating is known as:

There are some significant limitations to financial futures as interest-rate hedging devices;among them is a special form of risk known as credit risk.