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Banking
Q:
Trust preferred stock:
a. does not pay any dividends
b. has priority over all other claims.
c. is issued through a "preferred" bank subsidiary.
d. effectively allows banks to pay dividends that are tax deductible.
e. All of the above.
Q:
The Expedited Funds Availability Act stipulates that non-local checks typically must be cleared in no more than _____ business days.
a. 1
b. 2
c. 3
d. 4
e. 5
Q:
The Expedited Funds Availability Act stipulates that local checks typically must be cleared in no more than _____ business days.
a. 1
b. 2
c. 3
d. 4
e. 5
Q:
Speculators focus on avoiding or reducing risk.
Q:
If a hedger is owns the underling security, he will be long the futures position.
Q:
A long hedge would be appropriate for a bank that wants to reduce its cash market risk associated with .a decline in interest rates.
Q:
Forward contracts rarely require a performance guarantee or collateral.
Q:
Derivatives can be a cost-effective way to manage interest rate risk.
Q:
Speculators take a position to reduce their risk profile.
Q:
Banks can often replicate on-balance sheet transactions with off-balance sheet contracts.
Q:
Every futures contract has a formal expiration date.
Q:
"Locals" trade futures for their own account.
Q:
When futures prices falls, buyers gain at the expense of sellers.
Q:
A zero cost collar:
a. is risk-free.
b. is designed to offset margin requirements.
c. has a larger premium than a reverse collar.
d. designed so the buyer has no net premium payment.
e. None of the above.
Q:
A bank can establish a floor on interest rate costs by:
a. buying a call option on Eurodollar futures.
b. selling Eurodollar futures contracts.
c. selling a call option on Eurodollar futures.
d. a. and b.
e. b. and c.
Q:
How can a bank hedge when it makes 1-year fixed-rate loans and finances them with 3-month floating-rate deposits?
a. Buy Eurodollar futures contracts.
b. Sell put options on Eurodollar futures contracts.
c. Sell Eurodollar futures contracts.
d. Buy call options on Eurodollar futures contacts.
e. b. and c.
Q:
An interest rate collar consists of:
a. buying an interest rate cap and selling an interest rate floor.
b. buying an interest rate floor and selling an interest rate cap.
c. selling an interest rate floor and buying an interest rate cap.
d. buying a call option and selling a futures contract.
e. selling a put option and buying a futures contract.
Q:
A reverse collar consists of:
a. buying an interest rate floor and an interest rate cap.
b. buying an interest rate floor and selling an interest rate cap.
c. selling an interest rate floor and buying an interest rate cap.
d. buying a call option and selling a futures contract.
e. selling a put option and buying a futures contract.
Q:
Assume that two firms, one considered a high credit risk (HCR) and the other a low credit risk (LCR), are considering an interest rate swap. Each can borrow at the following rates:Fixed RateVariable RateLCR8%5%HCR12%7%An interest rate swap would be beneficial to both parties if:a. the LCR firm wants to borrow at the fixed rate and the HCR firm wants to borrow at the variable rate.b. the HCR firm wants to borrow at the fixed rate and the LCR firm wants to borrow at the variable rate.c. both firms want to borrow at the variable rate.d. both firms want to borrow at the fixed rate.e. an interest rate swap would be never be beneficial in this situation.
Q:
Which of the following is not an advantage of the swap market over the futures market for managing interest rate risk?
a. Getting out of a contract is easier in the swap market.
b. With a swap contract, you can hedge away longer-term risks than with futures contracts.
c. The notional amount of the swap can be set to any value acceptable to both trading parties.
d. All of the above are advantages of the swap market over the futures market.
e. a. and c. are not advantages of the swap market over the futures market.
Q:
Swap participants are subject to:
a. margin requirements.
b. Federal Reserve regulation E.
c. exchange performance.
d. counterparty risk.
e. All of the above.
Q:
Most interest rate swaps are set up for:
a. less than 6 months.
b. 6 months to 1 year.
c. 1 year to 10 years.
d. 11 to 20 years.
e. over 20 years.
Q:
In an interest rate swap, the notional principle:
a. is the difference in the fixed and floating interest rates.
b. is the difference in the fixed and floating interest payments.
c. is used to calculate the FRA basis.
d. is used to calculate the value of the interest payments.
e. is used to calculate the hedge ratio.
Q:
Which of the following is not true of forward rate agreements (FRA)?
a. The two counterparties to an FRA agree to a notional principal.
b. FRAs are traded on an organized exchange.
c. The buyer of a FRA agrees to pay a fixed-rate coupon payment.
d. FRAs are not as liquid as most futures contracts.
e. FRAs can be used to manage interest rate risk.
Q:
Which of the following would require a short hedge?
a. The bank has a positive gap in three months.
b. The bank anticipates receiving the repayment of a $30 million loan in 2 months. The funds will be rolled over immediately.
c. The bank is going to invest a large amount of money in Treasury bills.
d. The bank has a negative duration gap.
e. The bank plans to roll variable-rate CDs over into fixed-rate CDs.
Q:
How many 90-day Eurodollar futures contracts should a bank purchase to hedge the roll-over of a 6-month, $20 million loan if loan rates and Eurodollar rates have the same volatility?
a. 2 contracts
b. 4 contracts
c. 10 contracts
d. 20 contracts
e. 40 contracts
Q:
How many 90-day Eurodollar futures contracts should a bank purchase to hedge the roll-over of a 1-year, $5 million loan if loan rates and Eurodollar rates have the same volatility?
a. 1 contract
b. 5 contracts
c. 10 contracts
d. 20 contracts
e. 50 contracts
Q:
A cross hedge often has greater risk then a perfect hedge because:
a. futures and cash interest rates are perfectly positively correlated.
b. futures and cash interest rates are perfectly negatively correlated.
c. cross hedging uses a contract based on the identical underlying asset.
d. futures and cash interest rates may not move together.
e. b. and d.
Q:
What is a macrohedge?
a. It is a hedge of the bank's aggregate portfolio.
b. It is a hedge using just one type of futures contract.
c. It is the hedge of a specific asset or liability for which the bank is exposed to interest rate risk.
d. It is a hedge using two or more types of futures contracts.
e. It is a has that has a duration of less than one month.
Q:
What is a microhedge?
a. It is a hedge of the bank's aggregate portfolio.
b. It is a hedge using just one type of futures contract.
c. It is the hedge of a specific asset or liability for which the bank is exposed to interest rate risk.
d. It is a hedge using two or more types of futures contracts.
e. It is a has that has a duration of less than one month.
Q:
When the net profit on both the futures and cash position equals zero, this is known as a(n):
a. cross hedge.
b. perfect hedge.
c. imperfect hedge.
d. basis hedge.
e. return hedge.
Q:
Which of the following is not true regarding the basis?
a. The basis systematically declines as expiration approaches.
b. The basis must equal zero at expiration.
c. The basis may not equal zero before expiration.
d. The basis may be positive or negative.
e. both b. and c. are not true regarding the basis.
Q:
An investor anticipates she will have funds to invest in the T-Bill market. If she hedges by buying futures contracts and rates decline, which of the following is true?
a. The investor will profit on the futures contract.
b. The investor will profit in the spot market.
c. The investor will have locked in a minimum 10% return.
d. The investor will lose in the spot market.
e. a. and d.
Q:
A bank anticipates it will need to borrow funds in the Eurodollar market in the future. It hedges by selling futures contracts. If rates decline, which of the following is true?
a. The bank will profit on the futures contract.
b. The bank will profit in the cash market.
c. The bank will have locked in a low cost of borrowing.
d. The bank will lose in the cash market.
e. a. and d.
Q:
A trader buys a 90-day Eurodollar futures contract at 95.25. The next day, interest rates rise 5.25%. Which of the following is true? Assume that the initial and maintenance margins are $5,000.
a. The trader would have to deposit an additional $62,500 into her account.
b. The trader would have to deposit an additional $1,500 into her account.
c. The trader would have to deposit an additional $625 into her account.
d. The trader could withdraw $1,250 from her margin account.
e. The trader could withdraw $625 from her margin account.
Q:
A trader buys a 90-day Eurodollar futures contract at 95.25. The next day, interest rates fall 4.5%. Which of the following is true? Assume that the initial and maintenance margins are $5,000.
a. The trader would have to deposit an additional $62,500 into her account.
b. The trader would have to deposit an additional $2,500 into her account.
c. The trader would have to deposit an additional $625 into her account.
d. The trader could withdraw $2,500 from her margin account.
e. The trader could withdraw $625 from her margin account.
Q:
The basis on a futures contract is defined as:
a. the cash price minus the forward price.
b. the forward price minus the cash price.
c. the futures price minus the cash price.
d. the cash price minus the futures price.
e. None of the above.
Q:
The value of a basis point for 90-day Eurodollar Time Deposit futures contract is:
a. $10.
b. $100.
c. $25.
d. $250.
e. $500.
Q:
The daily settlement process that credits gains or deducts losses from a futures customer's account is called:
a. the variation margin.
b. marking-to-market.
c. the initial margin.
d. the maintenance margin.
e. the gain/loss ratio.
Q:
Which of the following is correct about futures contracts?
a. Buyers of futures contracts make a profit when prices rise.
b. Buyers of futures contracts make a profit when interest rates rise.
c. Sellers of futures contracts make a profit when prices rise.
d. Sellers of futures contracts make a profit when prices interest rates fall.
e. b. and d.
Q:
Which of the following is correct about futures contracts?
a. Buyers of futures contracts make a profit when prices fall.
b. Buyers of futures contracts make a profit when interest rates rise.
c. Sellers of futures contracts make a profit when prices fall.
d. Sellers of futures contracts make a profit when prices rise.
e. a. and d.
Q:
Which of the following is not a difference between futures and forward contracts?
a. Futures contracts are marked-to-market daily, while futures contracts are not.
b. Buyers and sellers deal directly with each other on forward contracts but go through and exchange with futures contracts.
c. Futures contracts are standardized, forward contracts generally are not.
d. Delivery rarely occurs on futures contracts but generally occurs with forward contracts.
e. All of the above are differences between futures and forward contracts.
Q:
____________ of financial futures contracts require physical delivery.
a. Nearly 100%
b. Approximately 75%
c. Approximately 50%
d. Approximately 25%
e. Less than 1%
Q:
The "initial margin" on a futures contract:
a. is a cash deposit the buyer places with the seller as good faith money.
b. can be cash or U.S. government securities placed with an exchange member.
c. are U.S. government securities the buyer places with the seller for safekeeping.
d. are the first installment on the payment for a futures contract.
e. is the amount by which the futures contract is initially "in the money."
Q:
The daily change in the value due to the marking-to-market process is know as the:
a. maintenance margin.
b. variation margin.
c. market margin.
d. initial margin.
e. marked margin.
Q:
To buy a futures contract, one must post a(n):
a. maintenance margin.
b. variation margin.
c. market margin.
d. initial margin.
e. marked margin.
Q:
Which of the following wishes to reduce risk?
a. Scalper
b. Local
c. Arbitrageur
d. Hedger
e. Day trader
Q:
Which of the following primarily takes futures positions that are outstanding for just minutes?
a. Scalper
b. Local
c. Day trader
d. Position trader
e. Commission broker
Q:
Which of the following executes trades for other parties?
a. Local
b. Day trader
c. Scalper
d. Position trader
e. Commission broker
Q:
Which of the following would generally not be considered a speculator?
a. Local
b. Day trader
c. Scalper
d. Position trader
e. Commission broker
Q:
Financial futures are:
a. a commitment between two parties to trade a financial instrument at a certain rate at a specified time in the future.
b. A call option on a standardized asset at a certain price at a specified time in the future.
c. A put option on a standardized asset at a certain price at a specified time in the future.
d. a commitment between two parties on the price of a standardized financial asset with the final settlement specified time in the future.
e. b. and c.
Q:
When you wish to own the underlying security, your spot position is _______.
a. fat.
b. long.
c. short.
d. skinny.
e. a. and c.
Q:
When you own the underlying security, your spot position is _______.
a. flat.
b. long.
c. short.
d. is also known as your cash position.
e. b. and d.
Q:
When you buy a futures contract, your futures position is:
a. flat.
b. long.
c. short.
d. the same as the cash position.
e. a. and d.
Q:
When you sell a futures contract, your futures position is:
a. flat.
b. long.
c. short.
d. the same as the cash position.
e. b. and d.
Q:
When an interest-bearing security is the underlying asset for a futures contract, it is called:
a. a forward contract.
b. an interest rate futures.
c. a commission futures.
d. a speculative futures.
e. an interest rate swap.
Q:
Banks use financial derivatives for all of the following except:
a. hedge asset yields.
b. adjust maturities by creating synthetic liabilities.
c. adjust the sensitivity of earnings to changes in interest rates.
d. lock-in the cost of liabilities.
e. Banks use financial derivatives for all of the above.
Q:
An instrument that derives its value from another underlying asset is known as a(n):
a. hedge.
b. derivative.
c. basis.
d. backdate agreement.
e. original document.
Q:
The duration of a liability that does not pay interest must be equal to 0.
Q:
The yield curve is typically inverted at the peak of the business cycle.
Q:
Duration of equity measures the dollar change in EVE with a 1% change in interest rates.
Q:
Banks should never assume any interest rate risk.
Q:
A bank with a duration gap of 1 is more sensitive to changes in the economic value of equity than a bank with a duration gap of —1.5.
Q:
Duration gap analysis focuses on changes in net interest income.
Q:
An asset that is rate-sensitive is generally not price sensitive.
Q:
Effective duration considers a security's embedded options.
Q:
An investor that matches the duration of an investment with her holding period balances price risk and reinvestment risk.
Q:
Economic value of equity analysis focuses on net interest income.
Q:
A liability sensitive bank decides to reduce risk by marketing 2-year CDs paying 5% instead of NOW accounts that pay 4%. The bank will benefit if:
a. the 2-year rate in one year is less than 5%.
b. the 1-year rate in one year is less than 6%.
c. the 1-year rate in one year is greater than 6%.
d. the 2-year rate in one year is greater than 6%.
e. Not enough information is given to determine the correct answer.
Q:
If the yield curve is inverted, a portfolio manager can take advantage of this by:
a. pricing more deposits on a fixed-rate basis.
b. buying more long-term securities
c. making variable-rate, callable loans.
d. increasing the number of rate-sensitive assets.
e. All of the above.
Q:
Which of the following is not a weakness of duration gap analysis?
a. It is difficult to accurately compute duration.
b. Each future cash flow must be discounted by the appropriate future interest rate.
c. The duration of a portfolio must be constantly monitored.
d. It is difficult to estimate the duration on zero coupon bonds.
e. All of the above are weaknesses of duration gap analysis.
Q:
What are the weaknesses of using static GAP analysis versus duration gap analysis?
a. Static GAP ignores the time value of money.
b. Static GAP ignores the cumulative impact of interest rate changes on a bank's risk profile.
c. Static GAP does not proscribe the treatment of demand deposits.
d. All of the above are weaknesses of using static GAP analysis versus duration gap analysis.
e. a. and b.
Q:
What is the strength of static GAP analysis relative to duration gap analysis?
a. Static GAP analysis recognizes the time value of money of each cash flow.
b. Static GAP analysis provides a measure of the total portfolio's interest rate risk.
c. Static GAP analysis is easier to understand.
d. Static GAP analysis takes the long-run view while duration gap analysis takes a shorter-run view.
e. The static GAP measure directly correlates with the risk of the bank, i.e., a bank with twice the static GAP is twice as risky.
Q:
Which of the following will not affect a bank's duration estimate for the year?
a. Prepayments on loans that exceed expectations.
b. A 20-year corporate bond that is unexpectedly called in 6 months.
c. Certificates of deposit that are withdrawn early.
d. Holding a 30-year Treasury bond until maturity.
e. All of the above will affect a bank's estimated duration for the year.
Q:
To perfectly immunize a bank's economic value of equity from changes in interest rate risk, it should:
a. adjust assets and liabilities such that its duration gap is equal to one.
b. adjust assets and liabilities such that its duration gap is greater than zero.
c. adjust assets and liabilities such that its duration gap is equal to zero.
d. adjust assets and liabilities such that its GAP is equal to zero.
e. adjust assets and liabilities such that its GAP is less than one.
Q:
For a bank that has a positive duration gap, an increase in interest rates will cause a(n) _______ in the economic value of assets, a(n) _______ in the economic value of liabilities, and a(n) _______ in the economic value of equity.
a. increase, decrease, increase
b. increase, increase, decrease
c. increase, increase, increase
d. decrease, decrease, increase
e. decrease, decrease, decrease
Q:
For a bank that has a negative duration gap, an increase in interest rates will cause a(n) _______ in the economic value of assets, a(n) _______ in the economic value of liabilities, and a(n) _______ in the economic value of equity.
a. increase, decrease, increase
b. increase, increase, decrease
c. increase, increase, increase
d. decrease, decrease, increase
e. decrease, increase, decrease
Q:
For a bank that has a positive duration gap, a decrease in interest rates will cause a(n) _______ in the economic value of assets, a(n) _______ in the economic value of liabilities, and a(n) _______ in the economic value of equity.
a. increase, decrease, increase
b. increase, increase, decrease
c. increase, increase, increase
d. decrease, decrease, increase
e. decrease, increase, decrease
Q:
For a bank that has a negative duration gap, a decrease in interest rates will cause a(n) _______ in the economic value of assets, a(n) _______ in the economic value of liabilities, and a(n) _______ in the economic value of equity.
a. increase, decrease, increase
b. increase, increase, decrease
c. increase, increase, increase
d. decrease, decrease, increase
e. decrease, increase, decrease
Q:
If interest rates rise 1% for all assets and liabilities, what is the approximate expected change in the economic value of equity?a. —$2.56b. $5.84c. —$5.84d. $22.19e. -$22.19