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Finance
Q:
The largest single category of loans on the typical bank's balance sheet in 2010 was
A. U.S. government securities
B. commercial and industrial loans
C. consumer loans
D. real estate loans
E. interbank loans
Q:
State chartered banks ________________ be members of the Federal Reserve System and nationally chartered banks ________________ be members of the Federal Reserve System.
A. must; may
B. must; must
C. may; must
D. may; may
Q:
Nationally chartered banks receive chartering and merger approval from the
A. Federal Deposit Insurance Corporation
B. Office of Comptroller of the Currency
C. Federal Reserve System
D. Office of Thrift Supervision
E. Any of the above may grant a charter and approve a merger.
Q:
About __________________ of federally insured banks are nationally chartered and about __________________ of federally insured banks are members of the Federal Reserve.
A. 77%; 65%
B. 65%; 77%
C. 34%; 22%
D. 22%; 34%
E. 40%; 60%
Q:
Most of the changes in size, structure, and composition of the banking industry in recent years are due to
A. bank failures
B. increasing regulations
C. new charters granted
D. declines in the number of branch offices
E. mergers and acquisitions
Q:
Which of the following could result in a negative NIM?
A. Growth in net interest income
B. Lower non interest expense
C. Decline in net interest income
D. Higher non interest income
E. Positive net interest spread
Q:
In terms of profitability, a well-run bank usually has an ROA of
A. 0.5-3%
B. 3-5%
C. 5-10%
D. 10-15%
E. 15-20%
Q:
In comparison to small banks, larger banks typically have
A. more equity capital
B. more core deposits
C. more off-balance-sheet activities
D. larger net interest margins
E. all of the above
Q:
Bank assets tend to have _____________ maturities and _____________ liquidity than/as bank liabilities.
A. longer; greater
B. longer; lower
C. shorter; greater
D. shorter; lower
E. equal; equal
Q:
Banking may be subdivided into at least three categories of banks. Match up the definitions with the appropriate name.
I. A bank that specializes in retail or consumer banking in a local market.
II. A bank that engages in a complete array of wholesale commercial banking activities and usually also provides retail banking services.
III. A bank that is located in a financial center and relies on nondeposit or borrowed sources of funds for a significant portion of its liabilities.
A. Money center bank; Community bank; Super-regional bank
B. Community bank; Money center bank; Super-regional bank
C. Super-regional bank; Money center bank; Community bank
D. Money center bank; Super-regional bank; Community bank
E. Community bank; Super-regional bank; Money center bank
Q:
In 2010, the notional value of bank off-balance-sheet activities was greater than bank industry assets.
Q:
Small banks control about 70% of banking industry assets.
Q:
Since 1980 the number of banks in the United States has been increasing dramatically due to deregulation of the industry.
Q:
The majority of banks are nationally chartered and insured by the FDIC.
Q:
Nontransaction deposits at banks include NOW accounts and demand deposits.
Q:
On average, bank liabilities tend to have shorter maturities and greater liquidity than bank assets.
Q:
Banks have an average total debt ratio of about 90%.
Q:
Loans comprise the single largest asset category for a bank.
Q:
Business loans have dropped in importance since 1987 as measured by the proportion of these loans on the bank balance sheet.
Q:
The higher the exercise price, the ________________ the value of a put and the _______________ the value of a call.
A. higher; higher
B. lower; lower
C. higher; lower
D. lower; higher
Q:
In a bear market, which option positions make money?
I. Buying a call
II. Writing a call
III. Buying a put
IV. Writing a put
A. I and II
B. I and III
C. II and IV
D. II and III
E. I and IV
Q:
You have taken a stock option position and if the stock's price increases you could lose a fixed small amount of money, but if the stock's price decreases your gain increases. You must have ________________________________.
A. bought a call option
B. bought a put option
C. written a call option
D. written a put option
E. purchased a straddle
Q:
A speculator may write a put option on stock with an exercise price of $15 and earn a $3 premium only if they thought
A. the stock price would stay above $12.
B. the stock volatility would increase.
C. the stock price would fall below $18.
D. the stock price would stay above $15.
E. the stock price would rise above $18 or fall below $12.
Q:
A higher level of which of the following variables would make a put option on common stock more valuable, ceteris paribus?
I. Stock price
II. Stock price volatility
III. Interest rates
IV. Exercise price
A. II only
B. II and IV only
C. I, II, and III only
D. I, III, and IV only
E. I, II, III, and IV
Q:
A contract that gives the holder the right to sell a security at a preset price only immediately before contract expiration is a(n)
A. American call option
B. European call option
C. American put option
D. European put option
E. knockout option
Q:
You find the following current quote for the March T-Bond contract: $100,000; Pts 32nd, of 100% You went long in the contract at the open. Which of the following is/are true?I. At the end of the day, your margin account would be increased.II. 55,210 contracts were traded that day.III. You agreed to deliver $100,000 face value T-Bonds in March in exchange for $89,120.IV. You agreed to purchase $100,000 face value T-Bonds in March in exchange for $89,375.A. I, II, and III onlyB. I, II, and IV onlyC. I and III onlyD. I and IV onlyE. IV only
Q:
You have agreed to deliver the underlying commodity on a futures contract in 90 days. Today the underlying commodity price rises and you get a margin call. You must have
A. a long position in a futures contract.
B. a short position in a futures contract.
C. sold a forward contract.
D. purchased a forward contract.
E. purchased a call option on a futures contract.
Q:
A professional futures trader who buys and sells futures for his own account throughout the day but typically closes out his positions at the end of the day is called a
A. floor broker
B. day trader
C. position trader
D. specialist
E. hedger
Q:
Which of the following is true?
A. Forward contracts have no default risk.
B. Futures contracts require an initial margin requirement be paid.
C. Forward contracts are marked to market daily.
D. Forward contract buyers and sellers do not know who the counterparty is.
E. Futures contracts are only traded over the counter.
Q:
An increase in which of the following would increase the price of a call option on common stock, ceteris paribus?
I. Stock price
II. Stock price volatility
III. Interest rates
IV. Exercise price
A. II only
B. II and IV only
C. I, II, and III only
D. I, III, and IV only
E. I, II, III, and IV
Q:
By convention, a swap buyer on an interest rate swap agrees to
A. periodically pay a fixed rate of interest and receive a floating rate of interest.
B. periodically pay a floating rate of interest and receive a fixed rate of interest.
C. swap both principle and interest at contract maturity.
D. back both sides of the swap agreement.
E. act as the dealer in the swap agreement.
Q:
Of the following, the most recent derivative security innovations are
A. foreign currency futures
B. interest rate futures
C. stock index futures
D. stock options
E. credit derivatives
Q:
An in the money American call option increases in value as expiration approaches, but an out of the money American call option decreases in value as expiration approaches.
Q:
The buyer of a call option on stock benefits if the underlying stock price rises or if the volatility of the stock's price increases.
Q:
Writing a put option results in a potentially limited gain and a potentially unlimited loss.
Q:
If you think that interest rates are likely to rise substantially over the next several years, you might sell a T-bond futures contract or buy an interest rate cap to take advantage of your expectations.
Q:
American options can only be exercised at maturity.
Q:
A clearinghouse backs the buyer's and seller's position in a forward contract.
Q:
You would expect the price quote for a put option to be at least $10 if the put had an exercise price of $40 and the underlying stock was selling for $50.
Q:
In a futures contract, if funds in the margin account fall below the maintenance margin requirement, a margin call is issued.
Q:
European-style options are options that may only be exercised at maturity.
Q:
Marking to market of futures contracts is the process of realizing gains and losses each day as the futures contract changes in price.
Q:
A negotiated non-standardized agreement between a buyer and seller (with no third party involvement) to exchange an asset for cash at some future date, with the price set today is called a forward agreement.
Q:
The purchaser of a T-bond futures contract priced at 101-16 at the time of sale agrees to deliver $100,000 face value Treasury bonds in exchange for receiving $101,500 at contract maturity.
Q:
Futures or option exchange members who take positions on contracts for only a few moments are called scalpers.
Q:
Forward contracts are marked to market daily.
Q:
A credit forward is a forward agreement that hedges against an increase in default risk on a loan after the loan has been created by a lender.
Q:
Suppose a stock is priced at $50. You are bullish on the stock and are considering buying March calls with an exercise price of $45 and $55, respectively. The 45 call is priced at $8.50 and the 55 call is quoted at $2.75. What should you consider in deciding which to purchase if you do not plan on exercising prior to maturity? Be specific.
Q:
When would an option hedge be better than a futures or forward hedge?
Q:
Using the Black-Scholes model, explain what happens to the value of a call as S, T, and s2 change. Why is the relationship between risk and price different for options than for other securities?
Q:
What kind of interest rate option could FNMA use to limit the interest rate risk? Explain how this would work. Explain how a collar could also be used.
Q:
What kind of interest rate swap could FNMA use to limit their interest rate risk? Explain.
Q:
A stock is priced at $27. An American call option on this stock with a $25 strike must be worth at least how much? Numerically show why.
Q:
Buying an at the money call option and writing an at the money put option are two ways to make money when prices rise. When would each be the preferable strategy?
Q:
How does a futures or option clearinghouse assist traders?
Q:
When might an option on a futures contract be preferable to an option on the underlying instrument?
Q:
When would a forward contract be better for hedging than a futures contract?
Q:
A U.S. firm has a European subsidiary that earns euros. The subsidiary has borrowed dollars at a floating rate of interest. What kind of risk does the subsidiary have? What kind of swap could be used to limit the subsidiary's risk? Be specific.
Q:
What determines the success or failure of an exchange-traded derivative contract? Why were currency and interest rate futures introduced in the early and late 1970s, respectively?
Q:
Figure 10-1 The type of swap most closely linked to the subprime mortgage crisis is the ____________.A. interest rate swapB. currency swapC. equity linked swapD. credit default swapE. DIF swap
Q:
Figure 10-1 A bank lender is concerned about the creditworthiness of one of its major borrowers. The bank is considering using a swap to reduce its credit exposure to this customer. Which type of swap would best meet this need?A. Interest rate swapB. Currency swapC. Equity linked swapD. Credit default swapE. DIF swap
Q:
Figure 10-1 A bank has made a risky loan to a midsize consumer goods manufacturer. With the weaker economy, the borrower is expected to have trouble repaying the loan. The bank decides to purchase a digital default option. Which one of the following payout patterns does a digital option provide?A. The option seller pays a stated amount to the option buyer, usually the par on the loan or bond, in the event of a default on the underlying credit.B. The option seller pays the buyer if the default risk premium or yield spread on a specified benchmark bond of the borrower increases above some exercise spread.C. If the option buyer makes fixed periodic payments to the option seller, the seller will pay the option buyer if a credit event occurs.D. If the option buyer makes periodic payments to the seller and delivers the underlying bond or loan, the seller pays the par value of the security.E. If interest rates change, the option seller will begin making fixed-rate payments to the option buyer.
Q:
Figure 10-1 If you buy the March put and don't exercise before contract maturity, you will make a profit if the stock price at maturity _______________________ from today's price.A. increases by more than 9.65%B. increases by more than 4.57%C. decreases by more than 3.94%D. decreases by more than 11.99%E. does not decrease by more than 5.64%
Q:
Figure 10-1 Based on the option quote, the June put should costI. more than $477II. more than $665III. more than the Mar and Jun 60 callsIV. more than the Mar 60 call but no more than the Jun 60 callA. I onlyB. I, II, and IV onlyC. I, II, and III onlyD. I and III onlyE. IV only
Q:
Figure 10-1 Based on the option quote, the Mar call should costA. more than $477B. more than $102C. less than $665 but more than $477D. less than $225E. $0
Q:
Your firm enters into a swap agreement with a notional principle of $40 million where the firm pays a fixed-rate of interest of 5.50% and receives a variable-rate of interest equal to LIBOR plus 150 basis points. If LIBOR is currently 3.75%, the NET amount your firm will receive (+) or pay (-) on the next transaction date is
A. -$2,200,000
B. $2,625,000
C. $125,000
D. -$100,000
E. -$875,000
Q:
Two competing fully electronic derivatives markets in the United States are
A. CME Globex and Eurex
B. Philadelphia Exchange and AMEX
C. NYSE and ABS
D. CME and Pacific Exchange
E. D-Trade and IMM
Q:
A contract where the buyer agrees to pay a specified interest rate on a loan where the loan will be originated at some future time is called a(n)
A. forward rate agreement
B. futures loan
C. option on a futures contract
D. interest rate swap contract
E. currency swap contract
Q:
My bank has a larger number of adjustable-rate mortgage loans outstanding. To protect our interest rate income on these loans the bank could
I. enter into a swap to pay fixed and receive variable.
II. enter into a swap to pay variable and receive fixed.
III. buy an interest rate floor.
IV. buy an interest rate cap.
A. I and III only
B. I and IV only
C. II and III only
D. II and IV only
Q:
An interest rate collar is
A. writing a floor and writing a cap.
B. buying a cap and writing a floor.
C. an option on a futures contract.
D. buying a cap and buying a floor.
E. none of the above
Q:
An interest rate floor is designed to protect an institution from
I. falling interest rates.
II. falling bond prices.
III. increased credit risk on loans.
IV. swap counterparty credit risk.
A. I and IV
B. II and III
C. I and III
D. II and IV
E. I only
Q:
A bank with long-term fixed-rate assets funded with short-term rate-sensitive liabilities could do which of the following to limit their interest rate risk?
I. Buy a cap.
II. Buy an interest rate swap.
III. Buy a floor.
IV. Sell an interest rate swap.
A. I and II only
B. III only
C. I and IV only
D. II and III only
E. III and IV only
Q:
The swap market's primary direct government regulator is the
A. SEC
B. CFTC
C. NYSE
D. WTO
E. Nobody
Q:
A bank with short-term floating-rate assets funded by long-term fixed-rate liabilities could hedge this risk by
I. buying a T-bond futures contract.
II. buying options on a T-bond futures contract.
III. entering into a swap agreement to pay a fixed rate and receive a variable rate.
IV. entering into a swap agreement to pay a variable rate and receive a fixed rate.
A. I and III only
B. I, II, and IV only
C. II and IV only
D. III only
E. IV only
Q:
An investor is committed to purchasing 100 shares of World Port Management stock in six months. She is worried the stock price will rise significantly over the next 6 months. The stock is at $45 and she buys a 6-month call with a strike of $50 for $250. At expiration the stock is at $54. What is the net economic gain or loss on the entire stock/option portfolio?
A. -$500
B. -$750
C. -$900
D. $400
E. $500
Q:
New futures contracts must be approved by
A. the CFTC
B. the SEC
C. the Warren Commission
D. the NYSE
E. the Federal Reserve
Q:
An investor has unrealized gains in 100 shares of Amazin stock upon which they do not wish to pay taxes. However, they are now bearish upon the stock for the short term. The stock is at $76 and he buys a put with a strike of $75 for $300. At expiration the stock is at $68. What is the net gain or loss on the entire stock/option portfolio?
A. $700
B. -$800
C. -$400
D. -$200
E. -$100
Q:
An agreement between two parties to exchange a series of specified periodic cash flows in the future based on some underlying instrument or price is a(n)
A. forward agreement
B. futures contract
C. interest rate collar
D. option contract
E. swap contract
Q:
A stock has a spot price of $55. Its May options are about to expire. One of its puts is worth $5 and one of its calls is worth $10. The exercise price of the put must be ______________ and the exercise price of the call must be ________________.
A. $50; $45
B. $55; $55
C. $60; $45
D. $60; $50
E. One cannot tell from the information given.
Q:
Measured by the amount outstanding, the largest type of derivative market in the world is the
A. futures market
B. forward market
C. swap market
D. options market
E. credit forward market