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Finance
Q:
Briefly explain how to choose the up and down values for the binomial method.
Q:
With liability management banking the control lever to regulate incoming bank funds is:
A) Management discretion
B) The volume of loan demand the bank faces.
C) Deposit growth
D) Price
E) None of the above.
Q:
Briefly explain put-call parity.
Q:
The doctrine that banks should be able to buy the reserves they need to cover good-quality loan requests is known as:
A) Funds Management
B) Asset Management
C) Liability Management
D) Asset-Liability Coordinated Management
E) None of the above.
Q:
Give an example of an option equivalent investment using common stock and borrowing.
Q:
The doctrine that the first priority of a bank is to make loans to all those customers from whom the bank expects to receive positive net earnings is called the:
A) Funds management doctrine
B) Customer relationship doctrine
C) Loan priority doctrine
D) Revenue flows doctrine
E) None of the above.
Q:
Briefly explain the term "option delta."
Q:
Only federal regulators can limit the terms (amount, frequency, and use) of borrower funds by the U.S. depository institutions.
Q:
Briefly explain what is meant by risk-neutral probability.
Q:
The size of a financial institution has an effect on the type of nondeposit funding source that it will consider. For example, larger depository institutions have the credit standing to sell the largest negotiable CDs, while the Fed funds market is suitable for smaller institutions.
Q:
Briefly explain risk-neutral valuation in the context of option valuation.
Q:
When the general credit conditions are tight, there is a possibility that not every borrower will be accommodated by a lender. This chance of credit rationing is referred to as credit availability risk.
Q:
Primary credit is defined as loans available for short terms and normally considered beneficial for the borrower because it carries an interest rate slightly below the target Fed funds rate.
Q:
Briefly explain why an option is always riskier than the underlying stock.
Q:
Briefly explain why discounted cash flow method (DCF) does not work for valuing options.
Q:
A knock-in barrier option might be used if the investor is looking to reduce the cost of buying a call option.
Q:
Interest rates in the Repurchase Agreement (RP) market are quoted on a 360-day basis.
Q:
The smaller the time periods used in the binomial model the closer it will come to approximating the Black-Scholes model price.
Q:
Repurchase Agreement (RPs) transactions are perceived to be less risky than equivalent federal funds transactions.
Q:
Multi-period binomial model can be used to evaluate an American put option.
Q:
Although there is an active federal funds spot market, there is currently no associated futures market for federal funds.
Q:
N(d1) and N(d2) are probabilities and therefore take values between 0 and 1.
Q:
The Black-Scholes model is a discrete time model.
Q:
A bank expects to raise $20 million in new money if it pays a deposit rate of 7%. It can raise $60 million in new money if it pays a deposit rate of 7.5%. It can raise $100 million in new money if it pays a deposit rate of 8% and it can raise $120 in new money if it pays a deposit rate of 8.5%. This bank expects to earn 9.5% on all money that it receives in new deposits. What is the marginal cost of deposits if this bank raises their deposit rate from 7.5% to 8%?
A) 11%
B) 8.75%
C) 7.75%
D) 7%
E) .5%
Q:
A bank expects to raise $20 million in new money if it pays a deposit rate of 7%. It can raise $60 million in new money if it pays a deposit rate of 7.5%. It can raise $100 million in new money if it pays a deposit rate of 8% and it can raise $120 in new money if it pays a deposit rate of 8.5%. This bank expects to earn 9.5% on all money that it receives in new deposits. What is the marginal cost of deposits if this bank raises their deposit rate from 8 to 8.5%?
A) 11%
B) 8.75%
C) 7.75%
D) 7%
E) .5%
Q:
58. 1 + upside change = u = e^(s)(h).
Q:
The binomial model is a discrete time model.
Q:
A bank expects to raise $20 million in new money if it pays a deposit rate of 7%. It can raise $60 million in new money if it pays a deposit rate of 7.5%. It can raise $100 million in new money if it pays a deposit rate of 8% and it can raise $120 in new money if it pays a deposit rate of 8.5%. This bank expects to earn 9.5% on all money that it receives in new deposits. What deposit rate should the bank offer on its deposits, if it uses the marginal cost method of determining deposits rates?
A) 7%
B) 7.5%
C) 8%
D) 8.5%
E) None of the above
Q:
55. For an European option: Value of put = (Value of call)-share price + PV (exercise price).
Q:
A bank expects to raise $30 million in new money if it pays a deposit rate of 7%. It can raise $60 million in new money if it pays a deposit rate of 7.5%. It can raise $80 million in new money if it pays a deposit rate of 8% and it can raise $100 million in new money if it pays a deposit rate of 8.5%. This bank expects to earn 9% on all money that it receives in new deposits. What is the marginal cost of deposits if this bank raises their deposit rate from 8% to 8.5%?
A) .5%
B) 7.5%
C) 8.0%
D) 9.5%
E) 10.5%
Q:
Option delta for a put option is always positive.
Q:
A bank expects to raise $30 million in new money if it pays a deposit rate of 7%. It can raise $60 million in new money if it pays a deposit rate of 7.5%. It can raise $80 million in new money if it pays a deposit rate of 8% and it can raise $100 million in new money if it pays a deposit rate of 8.5%. This bank expects to earn 9% on all money that it receives in new deposits. What is the marginal cost of deposits if this bank raises their deposit rate from 7.5% to 8%?
A) .5%
B) 7.5%
C) 8.0%
D) 9.5%
E) 10.5%
Q:
Why does the Black Scholes call formula use the present value of the exercise price and not merely the exercise price in the formula?
A. All finance must use the time value of money
B. Call options are rarely exercised early
C. You cannot exercise an option early
D. Because the put option uses the future value
Q:
Business (commercial) transaction accounts are generally more profitable than personal checking accounts, according to the textbook. Which of the following explain the reasons for this statement:
A) The average size of the business transaction is smaller than the personal transaction
B) Lower interest expenses are associated with commercial deposit transaction
C) The bank receives more investable funds in the commercial deposits transaction
D) A and B
E) B and C
Q:
Using the binomial model, what is the value of a three month option given the following data and assuming there are no time periods other than three months? The exercise price is $40; stock price is $46; the upside price is $48; the downside price is $34; the 3 month interest rate is 2%. The upside and down side have equal probabilities.
A. $3.92
B. $4.00
C. $5.88
D. $6.00
Q:
Which of these Acts is attempting to address the low savings rate of workers in the U.S. by including an automatic enrollment (default option) in employees retirement accounts?
A) The Economic Recovery Tax Act of 1981
B) The Tax Reform Act of 1986
C) The Tax Relief Act of 1997
D) The Pension Protection Act of 2006
E) None of the above
Q:
In the case of look back option:
A. the option holder must decide before maturity whether the option is a call or a put.
B. the option holder chooses as the exercise price any of the asset prices that occurred before the final date.
C. the option payoff is zero if the asset price is on the wrong side of the exercise price and otherwise is a fixed sum.
D. the exercise price is equal to the average of the asset's price during the life of the option.
Q:
Under the Truth in Savings Act, a bank must inform its customers of the terms being quoted on their deposits. Which of the following is not one of the terms listed?
A) Loan rate information
B) Balance computation method
C) Early withdrawal penalty
D) Transaction limitations
E) Minimum balance requirements
Q:
In the case of Asian option:
A. the option is exercisable on discrete dates before maturity.
B. the option holder chooses as the exercise price any of the asset prices that occurred before the final date.
C. the option payoff is zero if the asset price is on the wrong side of the exercise price and otherwise is a fixed sum.
D. the exercise price is equal to the average of the asset's price during the life of the option.
Q:
A bank expects to raise $30 million in new money if it pays a deposit rate of 7%. It can raise $60 million in new money if it pays a deposit rate of 7.5%. It can raise $80 million in new money if it pays a deposit rate of 8% and it can raise $100 million in new money if it pays a deposit rate of 8.5%. This bank expects to earn 9% on all money that it receives in new deposits. What is the marginal cost of deposits if the bank raises their deposit rate from 7 to 7.5%?
A) .5%
B) 7.5%
C) 8.0%
D) 9.5%
E) 10.5%
Q:
Suppose the exchange rate between US dollars and British pound is US$1.50 = BP1.00. If the interest rate is 6% per year what is the adjusted price of the British pound when valuing a foreign currency option with an expiration of one year? (Approximately)
A. $1.905
B. $1.4151
C. $0.7067
D. None of the above
Q:
A bank expects to raise $30 million in new money if it pays a deposit rate of 7%. It can raise $60 million in new money if it pays a deposit rate of 7.5%. It can raise $80 million in new money if it pays a deposit rate of 8% and it can raise $100 million in new money if it pays a deposit rate of 8.5%. This bank expects to earn 9% on all money that it receives in new deposits. What deposit rate should the bank offer on its deposits, if they use the marginal cost method of determining deposit rates?
A) 7%
B) 7.5%
C) 8%
D) 8.5%
E) None of the above
Q:
A bank has $500 in checking deposits. Interest and noninterest costs on these accounts are 6%. This bank has $250 in savings and time deposits with interest and noninterest costs of 14%. This bank has $250 in equity capital with a cost of 25%. This bank has estimated that reserve requirements, deposit insurance fees and uncollected balances reduce the amount of money available on checking deposits by 15% and on savings and time deposits by 4%. What is the banks before-tax cost of funds?
A) 15.00%
B) 12.75%
C) 13.42%
D) 15.74%
E) None of the above
Q:
A stock is currently selling for $50. The stock price could go up by 10% or fall by 5% each month. The monthly interest rate is 1% (periodic rate). Calculate the price of an American put option on the stock with an exercise price of $55 and a maturity of two months. (Use the two-stage binomial method)
A. $5.10
B. $3.96
C. $4.78
D. None of the above
Q:
A bank has $100 in checking deposits. Interest and noninterest costs on these accounts are 8%. This bank has $600 in savings and time deposits with interest and noninterest costs of 12%. This bank has $100 in equity capital with a cost of 26%. This bank has estimated that reserve requirements, deposit insurance fees and uncollected balances reduce the amount of money available on checking deposits by 20% and on savings and time deposits by 5%. What is the banks before-tax cost of funds?
A) 13.05%
B) 13.25%
C) 15.33%
D) 19.17%
E) None of the above
Q:
Which of the following statements regarding American puts is/are true?
A. An American put can be exercised any time before expiration
B. An American put is always more valuable than an equivalent European put
C. Multi-period binomial model can be used to value an American put
D. All of the above
Q:
A bank has $200 in checking deposits. Interest and noninterest costs on these accounts are 4%. This bank has $400 in savings and time deposits with interest and noninterest costs of 8%. This bank has $200 in equity capital with a cost of 24%. This bank as estimated that reserve requirements, deposit insurance fees and uncollected balances reduce the amount of money available on checking deposits by 10% and on savings and time deposits by 5%. What is this banks before-tax cost of funds?
A) 11.00%
B) 11.32%
C) 11.50%
D) 12.00%
E) None of the above
Q:
Which of the following statements about implied volatility is true?
A. VIX is the implied volatility on the Standard and Poor's index and VXN is the implied volatility on the New York Stock Exchange Index
B. VIX is the implied volatility on the Standard and Poor's index and VXN is the implied volatility on the NASDAQ index
C. VIX is the implied volatility on the NASDAQ index and VXN is the implied volatility on the Standard and Poor's index
D. VIX is the implied volatility on the New York Stock Exchange index and VXN is the implied volatility on the Standard and Poor's index
Q:
A bank determines from an analysis on its deposits that account processing and other operating expenses cost the bank $4.15 per month. It has also determined that its none operating expenses on its deposits are $1.65 per month. The bank wants to have a profit margin which is 10 percent of monthly costs. What monthly fee should this bank charge on its deposit accounts?
A) $6.38 per month
B) $5.80 per month
C) $4.57 per month
D) $4.15 per month
E) None of the above
Q:
The term [N(d2) * PV(EX)] in the Black-Scholes model represents:
A. call option delta
B. bank loan
C. put option delta
D. none of the above
Q:
A customer has a savings deposit for 15 days. During that time they earn $15 and have an average daily balance of $2200. What is the annual percentage yield on this savings account?
A) .68%
B) 16.36%
C) 16.59%
D) 17.98%
E) None of the above
Q:
N(d1) in the Black-Scholes model represents
I) call option delta
II) hedge ratio
III) probability
A. I only
B. II only
C. III only
D. I, II, and III
Q:
A customer has a savings deposit for 60 days. During that time they earn $11 and have an average daily balance of $1500. What is the annual percentage yield on this savings account?
A) .73%
B) 4.3%
C) 4.5%
D) 4.7%
E) None of the above
Q:
The value of N(d) in the Black-Scholes model can take any value between:
A. -1 and +1
B. 0 and +1
C. -1 and 0
D. None of the above
Q:
Prior to Depository Institution Deregulation and Control Act (DIDMCA), banks used . This tended to distort the allocation of scarce resources.
A) Free pricing
B) Conditionally free pricing
C) Flat-rate pricing
D) Marginal cost pricing
E) Nonprice competition
Q:
The Black-Scholes OPM is dependent on which five parameters?
A. Stock price, exercise price, risk free rate, beta, and time to maturity
B. Stock price, risk free rate, beta, time to maturity, and variance
C. Stock price, risk free rate, probability, variance and exercise price
D. Stock price, exercise price, risk free rate, variance and time to maturity
Q:
The deposit pricing method that focuses on the added cost of bringing in new funds is called:
A) Free pricing
B) Conditionally free pricing
C) Flat-rate pricing
D) Marginal cost pricing
E) Nonprice competition
Q:
If the volatility (variance) of the underlying stock increases then the: [Assume everything else remaining the same]
A. Value of the put option increases and that of the call option decreases
B. Value of the put option decreases and that of the call option increases
C. Value of both the put option and the call option increases
D. Value of both the put option and the call option decreases
Q:
The deposit pricing method that charges a fixed charge per check or per period or both is called:
A) Free pricing
B) Conditionally free pricing
C) Flat-rate pricing
D) Marginal cost pricing
E) Nonprice competition
Q:
If the strike price increases then the: [Assume everything else remaining the same]
A. Value of the put option increases and that of the call option decreases
B. Value of the put option decreases and that of the call option increases
C. Value of both the put option and the call option increases
D. Value of both the put option and the call option decreases
Q:
The deposit pricing method absent of any monthly account maintenance fee or per-transaction fee is called:
A) Free pricing
B) Conditionally free pricing
C) Flat-rate pricing
D) Marginal cost pricing
E) Nonprice competition
Q:
Given the following data: Stock price = $50; Exercise price = $45; Risk-free rate = 6%; variance = 0.2 ; Expiration = 3 months. Calculate value of a European call option: [Use Black-Scholes Formula]
A. $7.62
B. $7.90
C. $5.00
D. none of the above
Q:
If the value of d is -0.75, calculate the value of N(d):
A. 0.2266
B. -0.2266
C. 0.7734
D. -0.2734
Q:
The dominant holder of bank deposits in the U.S. is:
A) The private sector
B) State and local governments
C) Foreign governments
D) Deposits of other banks
E) None of the above
Q:
If the value of d2 is -0.5, then the value of N(d2) is:
A. -0.1915
B. 0.6915
C. 0.3085
D. 0.8085
Q:
What has made IRA and Keogh accounts more attractive to depositors recently?
A) Allowing the bank to have FDIC insurance on these accounts
B) Allowing the fund to grow tax free over the life of the fund
C) Allowing the depositor to pay no taxes on investment earnings when withdrawn
D) Requiring banks to pay at least 6% on these accounts to depositors
E) Increasing FDIC insurance coverage to $250,000 on these accounts
Q:
If the value of d1 is 1.25, then the value of N(d1) is equal to:
A. -0.1056
B. 1.25
C. 0.25
D. 0.8944
Q:
A time deposit that allows the depositor to withdraw some of his or her funds without a withdrawal penalty is called a:
A) Negotiable CD
B) Bump-up CD
C) Step-up CD
D) Liquid CD
E) None of the above
Q:
Cola Company has call options on its common stock traded in the market. The options have an exercise price of $45 and expire in 156 days. The current price of the Cola stock is $44.375. The risk-free rate is $7% per year and the standard deviation of the stock returns is 0.31. Calculate the value of d2: (approximately)
A. -0.02766
B. +0.02766
C. +0.2027
D. -0.2027
Q:
A time deposit that allows for a periodic upward adjustment to the promised rate is called a:
A) Negotiable CD
B) Bump-up CD
C) Step-up CD
D) Liquid CD
E) None of the above
Q:
A time deposit that is non-negotiable but where the promised interest rate can rise with market interest rates is called a:
A) Negotiable CD
B) Bump-up CD
C) Step-up CD
D) Liquid CD
E) None of the above
Q:
Then [d1] has a value of (approximately):
A. 0.3
B. 0.7
C. -0.7
D. 0.5
Q:
A time deposit that has a denominations greater than $100,000 and are generally for wealthy individuals and corporations is known as a:
A) Negotiable CD
B) Bump-up CD
C) Step-up CD
D) Liquid CD
E) None of the above
Q:
An European call option with an exercise price of $50 has a maturity (expiration) of six months, stock price of $54 and the instantaneous variance of the stock returns is 0.64. The risk-free rate is 9.2%. Calculate the value of d2 (approximately).
A. +0.0656
B. -0.0656
C. +0.5656
D. -0.5656
Q:
An account at a bank that carries a fixed maturity date with a fixed interest rate and which often carries a penalty for early withdrawal of money is called:
A) Demand deposit
B) Transaction deposit
C) Time deposit
D) Money market mutual deposit
E) None of the above
Q:
A traditional savings account where evidenced by the entries recorded in a booklet kept by the customer is called:
A) Passbook savings account
B) Statement savings plan
C) Negotiable order of withdrawal
D) Money market mutual fund
E) None of the above
Q:
The option delta in the case of Black-Scholes formula is:
A. d1
B. N(d1)
C. d2
D. N(d2)
Q:
The important assumptions of the Black-Scholes formula are:
I) the price of the underlying asset follows a lognormal random walk.
II) investors can adjust their hedge continuously and at no cost.
III) the risk-free rate is known.
IV) the underlying asset does not pay dividends.
A. I only
B. I and II only
C. I, II, III and IV
D. III and IV only
Q:
A savings account evidenced only by computer entry for which the customer gets a monthly printout is called:
A) Passbook savings account
B) Statement savings plan
C) Negotiable order of withdrawal
D) Money market mutual fund
E) None of the above
Q:
If the standard deviation of annual returns on the asset is 30% and the interval is a year, then the downside change is equal to :
A. 26%
B. 53.6%
C. 33.0%
D. 38.7%