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Banking
Q:
When investment banks allocate shares of a popular but underpriced IPO to executives of other firms in order to attract their business, it is called
A. spinning.
B. a bribe.
C. reputational activities.
D. a kickback.
Q:
The incentive for analysts in investment banks to distort research increases when
A. revenues from brokerage commissions increase.
B. the potential revenues from underwriting greatly exceed brokerage commissions.
C. the potential brokerage commissions greatly exceed revenues from underwriting.
D. revenues from underwriting decrease.
Q:
In investment banking, a conflict usually is present between the issuers of securities, who ________, and investors, who ________.
A. benefit from unbiased auditing; desire unbiased consulting
B. desire unbiased research; benefit from optimistic research
C. benefit from optimistic research; desire unbiased research
D. desire unbiased consulting; benefit from unbiased auditing
Q:
Not surprisingly, when financial institutions have consolidated more services under one roof, the amount of conflicts of interest has ________, which has led to ________ in unethical behavior.
A. increased; an increase
B. increased; a decrease
C. decreased; an increase
D. decreased; a decrease
Q:
Describe what is meant by economies of scope and explain how financial institutions' realizing economies of scope has led to an increase in conflicts of interest.
Q:
One problem with conflicts of interest is that they can reduce the ________ in financial markets, thereby increasing ________.
A. quantity of information; financial institutions' profits
B. quantity of information; asymmetric information
C. quality of information; asymmetric information
D. quality of information; financial institutions' profits
Q:
Which of the following is an example of a bank realizing economies of scope?
A. The bank develops a standard mortgage loan application to make the process of loaning out mortgages easier.
B. The bank reduces costs of credit checking for the loan process by outsourcing the process to a specialist.
C. By using the information collected from a corporation, the bank can decide how easy it would be to sell bonds issued by the corporation to the public.
D. A bank in a rural area specializes in providing agricultural loans.
Q:
When financial institutions are able to reduce the costs of information for each service they offer by applying the same information source to each service, we say that the financial institution is realizing
A. economies of scope.
B. economies of scale.
C. increasing returns.
D. diminishing marginal returns.
Q:
A type of ________ problem that occurs when a person or institution has multiple objectives that conflict with each other is called ________.
A. moral hazard; conflicts of interest
B. adverse selection; conflicts of interest
C. moral hazard; spinning
D. adverse selection; spinning
Q:
Conflicts of interest is a type of ________ problem that occurs when a person or institution has multiple objectives that are in conflict with each other.
A. moral hazard
B. adverse selection
C. risk sharing
D. spinning
Q:
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 created an Office of Credit Ratings at the SEC with its own staff and the authority to fine credit-rating agencies and to deregister an agency if it produces bad ratings. This is an example of which remedy of conflicts of interest?
A. regulate for transparency
B. supervisory oversight
C. leave it to the market
D. socialization of information production
Q:
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 authorized investors to bring lawsuits against credit-rating agencies for a reckless failure to get the facts when providing a credit rating. This is an example of which remedy of conflicts of interest?
A. regulate for transparency
B. supervisory oversight
C. leave it to the market
D. socialization of information production
Q:
Suppose Ford Motor Company issues a 5% bond with a stipulation that if a national index of SUV sales drops by 10%, then Ford can decrease the coupon rate to 3%. This security is called a
A. credit option.
B. credit swap.
C. credit-linked note.
D. credit default swap.
Q:
If one party pays a fixed fee on a regular basis in return for a contingent payment that is triggered by a downgrading of a firm's credit rating, that is called a
A. credit option.
B. credit swap.
C. credit-linked note.
D. credit default swap.
Q:
Suppose that Wells Fargo Home Mortgage sells $10 million worth of mortgage payments to GMAC in exchange for $10 million in auto loan payments. This type of transaction is called a
A. credit option.
B. credit swap.
C. credit-linked note.
D. credit default swap.
Q:
The credit derivative that, for a fee, gives the purchaser the right to receive profits that are tied either to the price of an underlying security or to an interest rate is called a
A. credit option.
B. credit swap.
C. credit-linked note.
D. credit default swap.
Q:
A advantage of using swaps to hedge interest-rate risk is that swaps
A. are less costly than futures.
B. can be written for long horizons.
C. are not subject to default risk.
D. are more liquid than futures.
Q:
One advantage of using swaps to eliminate interest-rate risk is that swaps
A. are less costly than futures.
B. are less costly than rearranging balance sheets.
C. are more liquid than futures.
D. have better accounting treatment than options.
Q:
If Second National Bank has more rate-sensitive liabilities then rate-sensitive assets, it can reduce interest rate risk with a swap that requires Second National to
A. pay fixed rate while receiving floating rate.
B. receive fixed rate while paying floating rate.
C. both receive and pay fixed rate.
D. both receive and pay floating rate.
Q:
If a bank has more rate-sensitive assets than rate-sensitive liabilities
A. it reduces interest rate risk by swapping rate-sensitive income for fixed rate income.
B. it reduces interest rate risk by swapping fixed rate income for rate-sensitive income.
C. it increases interest rate risk by swapping rate-sensitive income for fixed rate income.
D. it neutralizes interest rate risk by receiving and paying fixed-rate streams.
Q:
If Second National Bank has more rate-sensitive assets than rate-sensitive liabilities, it can reduce interest-rate risk with a swap that requires Second National to
A. pay fixed rate while receiving floating rate.
B. receive fixed rate while paying floating rate.
C. both receive and pay fixed rate.
D. both receive and pay floating rate.
Q:
The most common type of interest-rate swap is
A. the plain vanilla swap.
B. the basic swap.
C. the ordinary swap.
D. the notional swap.
Q:
A firm that sells goods to foreign countries on a regular basis can avoid exchange-rate risk by
A. buying stock options.
B. selling puts on financial futures.
C. using a foreign exchange swap.
D. buying swaptions.
Q:
A swap that involves the exchange of one set of interest payments for another set of interest payments is called
A. an interest rate swap.
B. a currency swap.
C. a swaption.
D. an international swap.
Q:
A swap that involves the exchange of a set of payments in one currency for a set of payments in another currency is
A. an interest-rate swap.
B. a currency swap.
C. a swaption.
D. an international swap.
Q:
A financial contract that obligates one party to exchange a set of payments it owns for another set of payments owned by another party is called a
A. hedge.
B. call option.
C. put option.
D. swap.
Q:
A tool for managing interest-rate risk that requires exchange of payment streams is a
A. futures contract.
B. forward contract.
C. swap.
D. micro hedge.
Q:
Show graphically and explain the profits and losses of buying futures relative to buying call options.
Q:
All other things held constant, premiums on options will increase when the
A. exercise price increases.
B. volatility of the underlying asset increases.
C. term to maturity decreases.
D. futures price increases.
Q:
All other things held constant, premiums on call options will increase when the
A. exercise price falls.
B. volatility of the underlying asset falls.
C. term to maturity decreases.
D. futures price increases.
Q:
Hedging by buying an option
A. limits gains.
B. limits losses.
C. limits gains and losses.
D. has no limit on option premiums.
Q:
If a bank manager wants to protect the bank against losses that would be incurred on its portfolio of treasury securities should interest rates rise, he could ________ options on financial futures.
A. buy put
B. buy call
C. sell put
D. sell call
Q:
The main advantage of using options on futures contracts rather than the futures contracts themselves is that interest-rate risk is
A. controlled while preserving the possibility of gains.
B. controlled, while removing the possibility of losses.
C. not controlled, but the possibility of gains is preserved.
D. not controlled, but the possibility of gains is lost.
Q:
If, for a $1000 premium, you buy a $100,000 put option on bond futures with a strike price of 114, and at the expiration date the price is 110, your ________ is ________.
A. profit; $4000
B. loss; $4000
C. profit; $3000
D. loss; $3000
Q:
If, for a $1000 premium, you buy a $100,000 put option on bond futures with a strike price of 110, and at the expiration date the price is 114, your ________ is ________.
A. profit; $1000
B. loss; $1000
C. profit; $3000
D. loss; $3000
Q:
If, for a $1000 premium, you buy a $100,000 call option on bond futures with a strike price of 114, and at the expiration date the price is 110, your ________ is ________.
A. profit; $1000
B. loss; $1000
C. profit; $3000
D. loss; $3000
Q:
If, for a $1000 premium, you buy a $100,000 call option on bond futures with a strike price of 110, and at the expiration date the price is 114, your ________ is ________.
A. profit; $4000
B. loss; $4000
C. profit; $3000
D. loss; $3000
Q:
If you buy a put option on treasury futures at 110, and at expiration the market price is 115, the ________ will ________ exercised.
A. call; be
B. put; be
C. call; not be
D. put; not be
Q:
If you buy a put option on Treasury futures at 115, and at expiration the market price is 110, the ________ will ________ exercised.
A. call; be
B. put; be
C. call; not be
D. put; not be
Q:
If you buy a call option on Treasury futures at 110, and at expiration the market price is 115, the ________ will ________ exercised.
A. call; be
B. put; be
C. call; not be
D. put; not be
Q:
If you buy a call option on Treasury futures at 115, and at expiration the market price is 110, the ________ will ________ exercised.
A. call; be
B. put; be
C. call; not be
D. put; not be
Q:
An option allowing the owner to sell an asset at a future date is a
A. put option.
B. call option.
C. futures contract.
D. forward contract.
Q:
A put option gives the seller the
A. right to sell the underlying security.
B. obligation to sell the underlying security.
C. right to buy the underlying security.
D. obligation to buy the underlying security.
Q:
A put option gives the owner the
A. right to sell the underlying security.
B. obligation to sell the underlying security.
C. right to buy the underlying security.
D. obligation to buy the underlying security.
Q:
An option that gives the owner the right to sell a financial instrument at the exercise price within a specified period of time is a
A. call option.
B. put option.
C. American option.
D. European option.
Q:
An option allowing the holder to buy an asset in the future is a
A. put option.
B. call option.
C. swap.
D. forward contract.
Q:
A call option gives the seller the
A. right to sell the underlying security.
B. obligation to sell the underlying security.
C. right to buy the underlying security.
D. obligation to buy the underlying security.
Q:
A call option gives the owner the
A. right to sell the underlying security.
B. obligation to sell the underlying security.
C. right to buy the underlying security.
D. obligation to buy the underlying security.
Q:
An option that gives the owner the right to buy a financial instrument at the exercise price within a specified period of time is a
A. call option.
B. put option.
C. American option.
D. European option.
Q:
Options on futures contracts are referred to as
A. stock options.
B. futures options.
C. American options.
D. individual options.
Q:
Options on individual stocks are referred to as
A. stock options.
B. futures options.
C. American options.
D. individual options.
Q:
An option that can only be exercised at maturity is called
A. a swap.
B. a stock option.
C. an European option.
D. an American option.
Q:
An option that can be exercised at any time up to maturity is called
A) a swap.
B) a stock option.
C) an European option.
D) an American option.
Q:
The amount paid for an option is theA. strike price.B. premium.C. discount.D. yield.
Q:
The seller of an option has the ________ to buy or sell the underlying asset while the purchaser of an option has the ________ to buy or sell the asset.
A. obligation; right
B. right; obligation
C. obligation; obligation
D. right; right
Q:
The seller of an option has the
A. right to buy or sell the underlying asset.
B. obligation to buy or sell the underlying asset.
C. ability to reduce transaction risk.
D. right to exchange one payment stream for another.
Q:
The price specified on an option at which the holder can buy or sell the underlying asset is called the
A. premium.
B. call.
C. strike price.
D. put.
Q:
Options are contracts that give the purchasers the
A. option to buy or sell an underlying asset.
B. obligation to buy or sell an underlying asset.
C. right to hold an underlying asset.
D. right to switch payment streams.
Q:
Explain the margin requirement for financial futures and how marking to market affects the margin account.
Q:
What is arbitrage? Explain why arbitrage drives the contract price of futures to the price of the underlying asset on the expiration date, for prices above and below the asset price.
Q:
If a firm must pay for goods it has ordered with foreign currency, it can hedge its foreign exchange-rate risk by ________ foreign exchange futures ________.
A. selling; short
B. buying; long
C. buying; short
D. selling; long
Q:
If a firm is due to be paid in euros in two months, to hedge against exchange-rate risk the firm should ________ foreign exchange futures ________.
A. sell; short
B. buy; long
C. sell; long
D. buy; short
Q:
Futures differ from forwards because they are
A. used to hedge portfolios.
B. used to hedge individual securities.
C. used in both financial and foreign exchange markets.
D. a standardized contract.
Q:
The number of futures contracts outstanding is called
A. turnover.
B. volume.
C. float.
D. open interest.
Q:
When the financial institution is hedging interest-rate risk on its overall portfolio, then the hedge is a
A. macro hedge.
B. micro hedge.
C. cross hedge.
D. futures hedge.
Q:
When a financial institution hedges the interest-rate risk for a specific asset, the hedge is called a
A. macro hedge.
B. micro hedge.
C. cross hedge.
D. futures hedge.
Q:
Assume you are holding Treasury securities and have sold futures to hedge against interest-rate risk. If interest rates fall
A. the increase in the value of the securities equals the decrease in the value of the futures contracts.
B. the decrease in the value of the securities equals the increase in the value of the futures contracts.
C. both the securities and the futures contracts decrease in value.
D. both the securities and the futures contracts increase in value.
Q:
Assume you are holding Treasury securities and have sold futures to hedge against interest-rate risk. If interest rates rise
A. the increase in the value of the securities equals the decrease in the value of the futures contracts.
B. the decrease in the value of the securities equals the increase in the value of the futures contracts.
C. both the securities and the futures contracts decrease in value.
D. both the securities and the futures contracts increase in value.
Q:
If you sell twenty-five $100,000 futures contracts to hedge holdings of a Treasury security, the value of the Treasury securities you are holding is
A. $250,000.
B. $1,000,000.
C. $2,500,000.
D. $5,000,000.
Q:
To hedge the interest rate risk on $4 million of Treasury bonds with $100,000 futures contracts, you would need to purchase
A. 4 contracts.
B. 20 contracts.
C. 25 contracts.
D. 40 contracts.
Q:
If you sold a short futures contract you will hope that bond prices
A. rise.
B. fall.
C. are stable.
D. fluctuate.
Q:
If you bought a long futures contract you hope that bond prices
A. rise.
B. fall.
C. are stable.
D. fluctuate.
Q:
If you bought a long contract on financial futures you hope that interest rates
A. rise.
B. fall.
C. are stable.
D. fluctuate.
Q:
If you sold a short contract on financial futures you hope interest rates
A. rise.
B. fall.
C. are stable.
D. fluctuate.
Q:
If you sell a $100,000 interest-rate futures contract for 105, and the price of the Treasury securities on the expiration date is 108, your ________ is ________.
A. profit; $3000
B. loss; $3000
C. profit; $8000
D. loss; $8000
Q:
If you sell a $100,000 interest-rate futures contract for 110, and the price of the Treasury securities on the expiration date is 106, your ________ is ________.
A. profit; $4000
B. loss; $4000
C. profit; $6000
D. loss; $6000
Q:
If you purchase a $100,000 interest-rate futures contract for 105, and the price of the Treasury securities on the expiration date is 108, your ________ is ________.
A. profit; $3000
B. loss; $3000
C. profit; $8000
D. loss; $8000
Q:
If you purchase a $100,000 interest-rate futures contract for 110, and the price of the Treasury securities on the expiration date is 106, your ________ is ________.
A. profit; $4000
B. loss; $4000
C. profit; $6000
D. loss; $6000
Q:
Elimination of riskless profit opportunities in the futures market is
A. hedging.
B. arbitrage.
C. speculation.
D. underwriting.
Q:
On the expiration date of a futures contract, the price of the contract converges to the
A. purchase price of the contract.
B. average price over the life of the contract.
C. price of the underlying asset.
D. average of the purchase price and the price of the underlying asset.