BUSI 321 Quiz 3 Derivatives Securities, Foreign Exchange Markets, Banks solutions complete answers

BUSI 321 Quiz 3 Derivatives Securities, Foreign Exchange Markets, Banks solutions complete answers

 

A speculator who expects the euro to appreciate might:

 

____ are not foreign exchange derivatives.

 

If the spot rate ____ the exercise price, a currency ____ option will not be exercised.

 

An interest rate swap agreement indicates the ____ value, is represents the principal amount to which interest rates are applied to determine the interest payments involved.

 

Trading restrictions imposed on specific stocks or stock indexes are referred to as

 

The use of financial leverage

 

Systemic risk reflects the risk that a particular event could

 

___________ involves the buying or selling of stock index futures with a simultaneous opposite position in the stocks that the index comprises.

 

Bill Baher, a private investor, purchased a futures contract on Treasury bonds at a price of 102-12. Two months later, Baher sells the same futures contract in order to close out the position. At that time, the futures contract specifies 103-15. What is Baher’s nominal profit? The par value of the futures contract is $100,000.

 

Interest rate futures are not available on

 

__________ occurs when a firm does not have adequate controls to monitor the employees responsible for its futures positions and those employees take more speculative positions than the firm desires.

 

_________ take positions in financial futures to reduce their exposure to future movements in interest rates or stock prices; ________ commonly take the opposite position and thus serve as counterparties on many transactions.

 

Laura sells an S&P 500 futures contract with a September settlement date when the index is 1750. By the settlement date, the S&P 500 index falls to 1400. The return on Laura’s position in the S&P 500 futures contract is ____ percent.

 

Sellers (writers) of call options can offset their position at any point in time by

 

Which of the following statements is least correct regarding corporations involved in international business transactions?

 

Speculators may be willing to write ____ options on foreign currencies they expect to ____ against the dollar.

 

Marcie purchases a call option on interest rate futures with an exercise price of 92-10. The premium on the call option is 2-24. Just before the expiration date, the price of Treasury bond futures is 97-14. At this time, Marcie decides to exercise the option and closes out the position by selling an identical futures contract. Marcie’s net gain from this strategy is $____.

 

A put option is “out of the money” when the

 

The ____ is not a factor affecting the call option premium.

 

Speculators who anticipate a decline in interest rates may consider ____ a ____ option on Treasury bond futures.

 

The longer the time to maturity, the ____ the call option premium and the ____ the put option premium.

 

A speculator purchases a put option for a premium of $4, with an exercise price of $30. The stock is presently priced at $29 and rises to $32 before the expiration date. What is the maximum profit per unit to the speculator who owned the put option assuming he or she exercises the option at the ideal time?

 

The option on a callable swap would most likely be exercised if interest rates

 

In a swap arrangement, the most common index used for floating-rate payments is the

 

Interest rate ____ are interest rate derivative instruments that are normally classified separately from interest rate swaps.

 

Hewitt Inc. has entered into an equity swap arrangement that allows it to swap a fixed interest rate of 8 percent in exchange for the rate of appreciation on the Dow Jones Industrial Average each year over a three-year period. The notional principal is $1 million. If the Dow depreciates by 1 percent over the year, Hewitt will

 

The Bank of Moronto has negotiated a plain vanilla swap whereby it will exchange fixed payments of 10 percent for floating payments equal to LIBOR plus 0.5 percent at the end of each of the next three years. In the first year, LIBOR is 8 percent; in the second year, 9 percent; in the third year, LIBOR is 7 percent. What is the total net payment the Bank of Moronto makes over the three-year period if the notional principal is $10 million?

 

Financial institutions such as U.S. savings institutions and commercial banks traditionally had fewer interest rate–sensitive ____ than ____ and therefore were adversely affected by ____ interest rates.

 

A ____ swap involves an exchange of interest rate payments that does not begin until a specified future point in time.

 

If a U.S. institution in a forward swap would like to lock in the fixed rate that it will pay when the swap period begins, it is probably concerned that interest rates will ____; the counterparty is likely adversely affected by ____ interest rates.

 

Financial institutions primarily use interest rate swaps in a way that will ____ exposure to interest rate risk and ____ potential returns.

 

The Bretton Woods era was the era

 

In the Wall Street Journal, you observe that the British pound (£) is quoted for $1.67. The Australian dollar (A$) is quoted for $0.62. What is the value of the Australian dollar in British pounds?

 

If a commercial bank expects the euro to appreciate against the dollar, it may take a ____ position in euros and a ____ position in dollars.

 

If U.S. interest rates suddenly become much higher than European interest rates (and if this does not cause concern about higher inflation in the United States), the U.S. demand for euros would ____, and the supply of euros to be exchanged for dollars would ____, other factors held constant.

 

____ forecasting involves the use of historical exchange rate data to predict future values.

 

Generally, a ____ home currency can ____ domestic economic growth.

 

In the Wall Street Journal, you observe that the British pound (£) is quoted at $1.65. The Australian dollar (A$) is quoted at $0.60. What is the value of the Australian dollar in British pounds?

 

The devaluation of a country’s currency:

 

Which of the following types of deposits does not allow any check-writing privileges?

 

States may enact _______ to set a maximum on the rate of interest that banks can charge.

 

A forward contract on currency:

 

Obtaining funds through ____ is not a common way for banks to satisfy a temporary deficiency of funds.

 

The Federal Reserve provides loans to banks in order to

 

Which of the following is not an off-balance sheet activity?

 

Banks sometimes need funds and sometimes have excess funds available. Which of the following is commonly a source of bank funds and a use of bank funds?

 

Before establishing foreign branches, a U.S. bank must obtain the approval of the:

 

If a bank has assets and liabilities in dollars and euros, its exposure to interest rate risk can best be minimized if the

 

The duration of zero-coupon bonds will be ____ the duration of coupon bonds with the same maturity.

 

The performance of a bank that continually concentrates on short-term deposits in euros and adjustable-rate dollar loans with equal rate sensitivity is

 

If interest rates ____, banks with ____ duration gaps will be ____ affected.

 

Bank A has interest revenues of $4 million, interest expenses of $5 million, and assets totaling $20 million. Bank A’s net interest margin is

-

Which of the following financial institutions would be most willing to swap variable-rate payments for fixed-rate payments in order to reduce exposure to interest rate risk?

 

During a period of ____ interest rates, a bank’s net interest margin will likely ____ if its liabilities are more rate sensitive than its assets

 

ROE is defined as

 

 

1.
32. Which of the following statements is incorrect with respect to cross-hedging?
 
 
2.
36. Currency futures may be purchased to hedge ____ or to capitalize on the expected ____ of that currency against the dollar.
 
 
3.
51. Financial futures contracts are rarely sold over the counter.
 
 
4.
According to the text, a futures contract on one financial instrument to protect a position in a different financial instrument is known as
 
 
5.
According to the text, when a financial institution sells futures contracts on securities in order to hedge against a change in interest rates, this is referred to as
 
 
6.
The actions of numerous institutional investors to sell stock index futures instead of selling stocks to prepare for a market decline would likely cause the index futures price to be
 
 
7.
A(n) ____ is a standardized agreement to deliver or receive a specified amount of a specified financial instrument at a specified price and date.
 
 
8.
Assume a corporation is receiving a large amount of funds in the near future. The company plans to use the funds to purchase municipal bonds. Also assume that the company is concerned that interest rates decrease before the purchase date, which would make the municipal bonds more expensive. In order to hedge against this possibility, the company should ____ MBI futures contracts. If interest rates decrease, the futures contract will generate a ____.
 
 
9.
Assume that a bank obtains most of its funds from large CDs with a one-year maturity. Its assets are in the form of loans with rates that adjust every six months. The bank would be ____ affected if interest rates increase. To partially hedge its position, it could ____ futures contracts.
 
 
10.
Assume that a futures contract on Treasury bonds with a face value of $100,000 is purchased at 93-00. If the same contract is later sold at 94-18, what is the gain, ignoring transactions costs?
 
 
11.
Assume that a stock mutual fund uses stock index futures as it conducts dynamic asset allocation. This means that the mutual fund
 
 
12.
Assume that a T-bill futures contract with a face value of $1 million is purchased at a price of $95.00 per $100 face value. At settlement, the price of T-bills is $95.50. What is the difference between the selling and purchase price of the futures contract?
 
 
13.
Assume that corporate bond portfolio managers are concerned about the possibility of many bond defaults resulting from a future recession. A short position in Treasury bond futures ____ an effective hedge against the default risk. A short position in Treasury bill futures ____ an effective hedge against the default risk.
 
 
14.
Assume that speculators had purchased a futures contract at the beginning of the year. If the price of a security represented by a futures contract ____ over the year, then these speculators would likely have purchased the futures contract for ____ than they can sell it for.
 
 
15.
The basis is the
 
 
16.
Bill Baher, a private investor, purchased a futures contract on Treasury bonds at a price of 102-12. Two months later, Baher sells the same futures contract in order to close out the position. At that time, the futures contract specifies 103-15. What is Baher’s nominal profit? The par value of the futures contract is $100,000.
 
 
17.
A bond index futures contract allows for the buying, but not the selling, of a bond index for a specified price at a specified date.
 
 
18.
Brokers commonly require margin deposits from their customers above those required by the exchanges.
 
 
19.
Clarke plans to satisfy cash needs in nine months by selling its Treasury bond holdings for $4 million. However, Clarke is concerned that interest rates might increase over the next three months. To hedge against this possibility, Clarke plans to sell Treasury bond futures. Thus, Clarke sells ____ futures contract for a price of 99-12. Assuming that the actual price of the futures contract declined to 97-20, Clarke would make a ____ of $____ from closing out the futures position.
 
 
20.
Companies with international trade can hedge ____ by ____ currency futures.
 
 
21.
Credit risk exists for futures contracts traded on exchanges, but it is normally not a concern for over-the-counter futures transactions.
 
 
22.
Dynamic asset allocation involves the switching between risky and low-risk investments by institutional investors over time in response to changing expectations.
 
 
23.
The effectiveness of a cross-hedge depends on the degree of correlation between the market values of the two financial instruments.
 
 
24.
Financial futures contracts on stock indexes are referred to as interest rate futures.
 
 
25.
Financial futures contracts on U.S. securities are ____ by non-U.S. financial institutions.
 
 
26.
Financial futures contracts on U.S. securities are commonly traded by non-U.S. financial institutions that maintain holdings of U.S. securities.
 
 
27.
A financial institution that hedges with interest rate futures is less sensitive to economic events than an institution that does not hedge
 
 
 
 
 
 
 
 
 
 
 
 
 

28.
A financial institution that maintains some Treasury bond holdings sells Treasury bond futures contracts. If interest rates increase, the market value of the bond holdings will ____ and the position in futures contracts will result in a ____.
 
 
29.
A financial institution that wishes to reduce its exposure to the possibility of declining interest rates might use
 
 
30.
Financial leverage, when used in association with a futures contract, ____ the positive returns and
 
 
31.
Futures exchanges take buy or sell positions on futures contracts.
 
 
32.
The futures price is mainly a function of the prevailing price of the underlying security plus an expected adjustment in that price by the settlement date.
 
 
33.
If a financial institution expects that the market value of its municipal bonds will decline because of economic conditions, it could hedge its position by ____ futures contracts on ____.
 
 
34.
If a futures contract is more volatile than the portfolio value, the amount of principal represented by the futures contracts to hedge the portfolio is ____ the market value of the securities to be hedged.
 
 
35.
If speculators believe interest rates will ____, they would consider ____ a T-bill futures contract today.
 
 
36.
If the prices of Treasury bonds ____, the value of an existing Treasury bond futures contract should ____.
 
 
37.
If there are ____ traders with buy offers than sell offers for a particular contract, the futures price will ____ until this imbalance is removed.
 
 
38.
In cross-hedging, if the futures contract value is ____ volatile than the portfolio value, hedging will require a ____ amount of principal represented by the futures contracts.
 
 
39.
The initial margin of a futures contract is typically between ____ percent of a futures contract’s full value.
 
 
40.
Interest rate futures are not available on
 
 
41.
___________ involves the buying or selling of stock index futures with a simultaneous opposite position in the stocks that the index comprises.
 
 
42.
Laura sells an S&P 500 futures contract with a September settlement date when the index is 1,750. By the settlement date, the S&P 500 index falls to 1,400. The return on Laura’s position in the S&P 500 futures contract is ____ percent.
 
 
43.
Marcia buys an S&P 500 futures contract with a September settlement date when the index is 1,750. By the settlement date, the S&P 500 index falls to 1,400. The return on Marcia’s position in the S&P 500 futures contract is ____ percent.
 
 
44.
Market participants who expect the stock market to perform poorly before the settlement date may consider selling S&P 500 index futures.
 
 
45.
Municipal Bond Index (MBI) futures
 
 
46.
The net gain or loss on a futures contract for a stock index that is not closed out is based on the difference between the futures price when the initial position was created and the futures price at
 
 
47.
__________ occurs when a firm does not have adequate controls to monitor the employees responsible for its futures positions and those employees take more speculative positions than the firm desires.
 
 
48.
The price of stock index futures may reflect investor expectations about the market more rapidly than stock prices.
 
 
49.
The prices of stock index futures
 
 
50.
The profits of a financial institution with interest-rate sensitive liabilities and interest rate-insensitive assets are ____ with hedging than without hedging if interest rates decrease.
 
 
51.
Purchasers of currency futures contracts are required to hold the contract until the settlement date and accept delivery of the foreign currency at that time.
 
 
52.
Purchasers of financial futures contracts usually know who the sellers are, and vice versa.
 
 
53.
____ risk is the risk of losses as a result of inadequate management or controls.
 
 
54.
____ risk is the risk that the position being hedged by a futures contract is not affected in the same manner as the instrument underlying the futures contract.
 
 
 
 
 
 
 
 
 

55.
The risk that the position being hedged by a futures position is not affected in the same manner as the instrument underlying the financial futures contract, is referred to as
 
 
56.
A savings and loan association has long-term fixed-rate mortgages financed by short-term funds. It hedges by selling Treasury bond futures. If interest rates decline, and many mortgages are prepaid
 
 
57.
Settlement of stock index futures contracts occurs through delivery of the underlying securities.
 
 
58.
Since stock index futures prices are primarily driven by movements in the corresponding stock indexes, participants in stock index futures monitor indicators that may signal changes in the stock indexes.
 
 
59.
Some specialized futures contracts are sold over the counter, whereas standardized financial futures contracts are traded on exchanges.
 
 
60.
Speculators in futures contracts that normally close out their futures positions on the same day that the positions were initiated are referred to as
 
 
61.
Speculators in futures contracts that normally maintain the futures position that they initiate for extended periods of time (such as weeks or months) are referred to as
 
 
62.
Stock index futures are priced ____ than the stock index itself.
 
 
63.
Stock index futures cannot be closed out before the settlement date.
 
 
64.
Systemic risk reflects the risk that a particular event could
 
 
65.
_________ take positions in financial futures to reduce their exposure to future movements in interest rates or stock prices; ________ commonly take the opposite position and thus serve as counterparties on many transactions.
 
 
66.
____ take positions in futures to reduce their exposure to future movements in interest rates or stock prices.
 
 
67.
____ trade futures contracts for their own account.
 
 
68.
Trading restrictions imposed on specific stocks or stock indices are referred to as
 
 
69.
An unexpected ____ in the consumer price index tends to create expectations of ____ interest rates and places ____ pressure on Treasury bond futures prices.
 
 
70.
The use of financial leverage
 
 
71.
The value of an S&P 500 futures contract is $500 times the index. Assume the futures price on the S&P 500 index is 1612 at the time of purchase. If the index price is $1619 when the position is closed out, the gain is
 
 
72.
The value of a stock index futures contract has little correlation with the value of the underlying stock index.
 
 
73.
Which of the following is incorrect regarding organized exchanges trading financial futures contracts?
 
 
74.
Which of the following is not a type of risk associated with futures contracts?
 
 
75.
. Which of the following statements is incorrect?
 
 
76.
Which of the following statements is incorrect regarding organized futures exchanges?
 
 
 
 
 
 
 
 
 

 

1.
American-style stock options can be exercised only just before expiration.
a. True
b. False
 
 
2.
Assume a pension fund purchased stock at $53. Call options at a $50 exercise price presently have a $4 premium per share. The pension fund sells a call option on the stock it owns. If the call option is exercised when the price of the stock is $56, what is the gain or loss per share to the pension fund (including its gain from holding the stock as well)?
a. $4 gain
b. $6 loss
c. $2 loss
d. $1 gain
e. $0
 
 
3.
Assuming the same expiration date, an option with a ____ exercise price has a ____ call option premium and a ____ put option premium.
a. higher; higher; higher
b. higher; higher; lower
c. higher; lower; higher
d. lower; lower; higher
e. none of the above
 
 
4.
Backdating occurs when CEOs (or other executives) reset the date that their options were granted to an earlier date when the stock price was lower.
a. True
b. False
 
 
5.
Brad expects interest rates to increase and purchases a put option on Treasury bond futures with an exercise price of 97-00. The premium paid for the put option is 3-00. Just prior to the expiration date, the price of the Treasury bond futures contract is valued at 89-00. Brad exercises the option and closes out the position by purchasing an identical futures contract. Brad’s net gain from this speculative strategy is $____, and his return on his investment is about _______ percent.
a. 5,300;366

b. 11,000; 27

c. -5,000; −167

d. 5,000;167

e. none of the above
 
 
6.
A call option is said to be at the money when the market price of the underlying security exceeds the exercise price.
a. True
b. False
 
 
7.
Corporations involved in international business transactions can ____ to hedge future ____.
a. sell currency call options; payables
b. purchase currency put options; receivables
c. purchase currency call options, receivables
d. purchase currency put options, payables
e. A and B
 
 
8.
Covered call writing ____ the upside potential return and ____ the risk of an investment in stock.
a. increases; increases
b. increases; decreases
c. limits; increases
d. limits; decreases
 
 
9.
European-style stock options
a. are long-term options (at least one year until expiration at the time they are created).
b. can be exercised after the expiration date.
c. can be exercised any time until the expiration date.
d. none of the above
 
 
10.
____ execute transactions desired by investors and trade stock options for their own account.
a. Floor brokers
b. Discount brokers
c. Market makers
d. none of the above
 
 
11.
A ____ grants the owner the right to purchase a specified financial instrument for a specified price within a specified period of time.
a. call option
b. put option
c. sale of a futures contract
d. purchase of a futures contract
 
 
12.
The greater the volatility of the underlying stock, the ____ the call option premium and the ____ the put option premium.
a. higher; lower
b. lower; higher
c. higher; higher
d. lower; lower
 
 
13.
The higher the existing market price of the underlying financial instrument relative to the exercise price, the higher the put option premium, other things being equal.
a. True
b. False
 
 
14.
If a corporation hedges payables with currency call options, it will ____ if the value of the foreign currency is ____ than the exercise price when the payables are due.
a. exercise the option; greater
b. exercise the option; less
c. let the option expire; greater
d. let the option expire; less
e. A and D
 
 
15.
An increase in uncertainty results in a higher implied standard deviation for the stock, which means that the writer of an option requires a higher premium to compensate for the anticipated increase in the stock’s volatility.
a. True
b. False
 
 
16.
The ____ is not a factor affecting the call option premium.
a. market price of the underlying instrument (relative to the option’s exercise price)
b. volatility of the underlying instrument
c. current price of futures contracts on the underlying instrument
d. time to maturity of the call option
 
 
17.
The ____ is the most important exchange for trading options.
a. New York Stock Exchange (NYSE)
b. Chicago Board Options Exchange (CBOE)
c. Boston Options Exchange
d. NYSE MKT
 
 
18.
A key requirement for listing stock options on an exchange is that the trading volume of the underlying stock must reach a certain minimum level.
a. True
b. False
 
 
19.
The longer a call option’s time to maturity, the lower the call option premium, other things being equal.
a. True
b. False
 
 
 
 
 
 
 
 
 
 
 
 

20.
The longer the time to maturity, the ____ the call option premium and the ____ the put option premium.
a. higher; lower
b. lower; higher
c. higher; higher
d. lower; lower
 
 
21.
Marcie purchases a call option on interest rate futures with an exercise price of 92-10. The premium on the call option is 2-24. Just before the expiration date, the price of Treasury bond futures is 97-14. At this time, Marcie decides to exercise the option and closes out the position by selling an identical futures contract. Marcie’s net gain from this strategy is $____.
a. -2,687.50

b. 2,687.50

c. 2,375.00

d. 7,437.50

e. none of the above
 
 
22.
Market makers can execute stock option transactions for customers but do not trade stock options for their own account.
a. True
b. False
 
 
23.
The motive for CEOs to backdate options is that it allows them to exercise the options at a lower exercise price.
a. True
b. False
 
 
24.
On an exchange, option trades can be executed
a. by a floor broker.
b. electronically.
c. by a market maker.
d. all of the above
e. A and B only
 
 
25.
The Options Clearing Corporation (OCC) serves as a guarantor on option contracts traded in the United States.
a. True
b. False
 
 
26.
Options on small stocks normally have higher premiums than options on large stocks because small stocks typically are more volatile.
a. True
b. False
 
 
27.
Options on stock indexes representing non-U.S. stocks are ____; options exchanges have been established ____.
a. available; in numerous non-U.S. countries
b. not available; in numerous non-U.S. countries
c. available; only in the United States
d. not available; only in the United States
 
 
28.
Option trading is regulated by the
a. Options Clearing Corporation.
b. International Securities Exchange.
c. Securities and Exchange Commission.
d. Federal Reserve.
 
 
29.
An option with a higher exercise price has a higher call option premium and a lower put option premium.
a. True
b. False
 
 
30.
The premium on an existing call option should ____ when there is an increase in the expected short-term volatility of the stock price.
a. be negative
b. decline
c. increase
d. be unaffected
e. A and B
 
 
31.
The premium on an existing call option should ____ when there is a reduction in the expected short-term volatility of the stock price.
a. be negative
b. decline
c. increase
d. be unaffected
e. A and B
 
 
32.
The premium on an existing call option should ____ when the underlying stock price decreases.
a. be negative
b. decline
c. increase
d. be unaffected
e. A and B
 
 
 
 
 
 
 
 
 

33.
The premium on an existing put option should ____ when there is an increase in the expected short-term volatility of the stock price.
a. be negative
b. decline
c. increase
d. be unaffected
e. A and B
 
 
34.
The premium on an existing put option should ____ when there is a reduction in the expected short-term volatility of the stock price.
a. be negative
b. decline
c. increase
d. be unaffected
e. A and B
 
 
35.
The premium on an existing put option should ____ when the underlying stock price increases.
a. be negative
b. decline
c. increase
d. be unaffected
e. A and B
 
 
36.
The purchaser of an American-style put option is always better off exercising the option at the expiration date than before that date.
a. True
b. False
 
 
37.
A put option is “out of the money” when the
a. market price of the security exceeds the exercise price.
b. market price of the security equals the exercise price.
c. market price of the security is less than the exercise price.
d. premium on the option is less than the exercise price.
 
 
38.
Put options are more typically used to hedge when portfolio managers are mainly concerned about a temporary decline in a stock’s value.
a. True
b. False
 
 
39.
Put options are typically used to hedge when portfolio managers are mainly concerned about
a. a permanent decline in a stock’s value.
b. a permanent increase in a stock’s value.
c. a temporary decline in a stock’s value.
d. a temporary increase in a stock’s value.
 
 
40.
Reese Insurance company sold a call option on interest rate futures with an exercise price of 92-10. The premium on the call option is 2-24. Just before the expiration date, the price of Treasury bond futures is 97-14. At this time, the option was exercised as the buyer closed out the position by selling an identical futures contract. Reese’s net gain from selling the call option is $____.
a. 2,687.50

b. -2,687.50

c. 2,375.00

d. 7,437.50

e. none of the above
 
 
41.
A ____ requires a premium above and beyond the price to be paid for the financial instrument.
a. futures contract
b. call option
c. put option
d. B and C
 
 
42.
The results with covered call writing are better than without covered call writing when the stock performs poorly and better when the stock performs well.
a. True
b. False
 
 
43.
The sale of a call option on a stock the seller already owns is referred to as
a. a covered call.
b. a naked call
c. call on futures.
d. futures on options.
 
 
44.
Sellers (writers) of call options can offset their position at any point in time by
a. selling a put option on the same stock.
b. buying identical call options.
c. selling additional call options on the same stock.
d. all of the above
e. A and B
 
 
 
 
 
 
 
 
 

45.
Several call options are available for a given stock, and the risk-return potential will vary among them
a. True
b. False
 
 
46.
A speculator buys a call option for $3, with an exercise price of $50. The stock is currently priced at $49, and rises to $55 on the expiration date. What is the stock price at which the speculator would break even?
a. $50
b. $58
c. $52
d. $53
e. $49
 
 
47.
A speculator purchased a call option with an exercise price of $31 for a premium of $4. The option was exercised a few days later when the stock price was $34. What was the return to the speculator?
a. 25 percent
b. -25 percent
c. -3.2 percent
d. -2.9 percent
 
 
48.
A speculator purchases a put option for a premium of $4, with an exercise price of $30. The stock is presently priced at $29 and rises to $32 before the expiration date. What is the maximum profit per unit to the speculator who owned the put option assuming he or she exercises the option at the ideal time?
a. -$4
b. -$3
c. -$2
d. $2
e. $3
 
 
49.
A speculator purchases a put option for a premium of $4, with an exercise price of $30. The stock is presently priced at $29 and rises to $32 before the expiration date. What is the stock price at which the speculator would break even?
a. $26
b. $34
c. $28
d. $29
e. $32
 
 
50.
A speculator purchases a put option on Treasury bond futures with a September delivery date with an exercise price of 85-00. The option has a premium of 2-00. Assume that the price of the futures contract decreases to 82-00 on the expiration date and the option is exercised at that point (if it is feasible). What is the net gain?
a. $1,968.75
b. $3,750.00
c. $3,000.00
d. -$2,000.00
e. $1,000.00
 
 
51.
Speculators may be willing to write ____ options on foreign currencies they expect to ____ against the dollar.
a. put; strengthen
b. put; weaken
c. call; strengthen
d. call; weaken
e. A and D
 
 
52.
Speculators purchase currency ____ on currencies they expect to ____ against the dollar.
a. call options; weaken
b. put options; strengthen
c. futures; weaken
d. put options; weaken
 
 
53.
Speculators sell call options on currencies that they expect to strengthen against the dollar.
a. True
b. False
 
 
54.
Speculators who anticipate a decline in interest rates may consider ____ a ____ option on Treasury bond futures.
a. purchasing; put

b. selling; call

c. purchasing; call

d. none of the above
 
 
55.
Speculators who anticipate a decline in interest rates may consider writing a call option on Treasury bond futures.
a. True
b. False
 
 
56.
Speculators who anticipate a sharp increase in stock market prices overall may consider purchasing put options on one of the market indexes.
a. True
b. False
 
 
 
 
 
 
 
 
 

57.
ssume an insurance company purchases a call option on an S&P 500 Index futures contract for a premium of 14, with an exercise price of 1800. The value of an S&P 500 futures contract is 250 times the index. If the index on the futures contract increases to 1830, what is the gain on the sale of the futures contract?
a. $15,000
b. $7,500
c. $3,300
d. $4,000
e. $1,500
 
 
58.
Stock options can be used by speculators to benefit from their expectations and by financial institutions to reduce their risk.
a. True
b. False
 
 
59.
The ____, the higher the call option premium, other things being equal.
a. lower the existing price of the security relative to the exercise price
b. lower the variability of the security’s market price
c. longer the maturity of the option
d. A and B
 
 
60.
Vince, a speculator, expects interest rates to increase and purchases a put option on Treasury bond futures with an exercise price of 95-32. The premium paid for the put option is 2-36. Just prior to the expiration date, the price of the Treasury bond futures contract is valued at 93-22. Vince exercises the option and closes out the position by purchasing an identical futures contract. Vince’s net gain from this speculative strategy is $____.
a. -406.25

b. 4,718.75

c. -4,718.75

d. -812.50

e. none of the above
 
 
61.
When a stock index option is exercised, the cash payment is equal to a specified dollar amount
a. multiplied by the index level.
b. multiplied by the exercise price.
c. multiplied by the difference between the index level and the exercise price.
d. multiplied by the sum of the index level and the exercise price.
 
 
62.
When investors purchase an option that does not hedge their existing investments, the option can be referred to as “naked.”
a. True
b. False
 
 
63.
When stock portfolio managers use dynamic asset allocation by purchasing call options on a stock index, they ____ their exposure to stock market conditions.
a. reduce
b. completely eliminate
c. have no effect on
d. increase
 
 
64.
When the market price of the underlying security exceeds the exercise price, a
a. call option is in the money.
b. put option is in the money.
c. call option is at the money.
d. call option is out of the money.
 
 
65.
Which of the following can normally be found in quotations for stock options provided by the financial media?
a. exercise price, expiration date, and implied volatility
b. exercise price, expiration date, and most recently quoted premium
c. expiration date, implied volatility, and trading volume
d. expiration date, most recently quoted premium, and implied volatility
 
 
 
 
 
 
 
 
 

66.
Which of the following does not directly affect a call option premium?
a. volatility of the underlying instrument
b. market price of the underlying instrument
c. analyst rating of the underlying instrument
d. time to maturity of the option
 
 
67.
Which of the following is not a difference between purchasing an option and purchasing a futures contract?
a. The option requires that a premium be paid in addition to the price of the financial instrument.
b. Owners of options can choose to let the option expire on the so-called expiration date without exercising it.
c. The fulfillment of futures contracts is regulated by exchanges, while the fulfillment of options is not.
d. All of the above are differences between purchasing an option and purchasing a futures
 
 
68.
Which of the following is not an assumption underlying the Black-Scholes option-pricing model?
a. The risk-free rate is known and constant over the life of the option.
b. The probability distribution of stock prices is lognormal.
c. The world is risk-neutral.
d. The variability of a stock’s return is constant.
e. There are no transaction costs involved in trading options.
 
 
69.
Which of the following is not true with respect to market makers?
a. They benefit from the spread.
b. They may earn profits when they take positions in options.
c. They are not subject to a risk of loss on their positions in options.
d. All of the above are true with respect to market makers.
 
 
70.
Which of the following statements is incorrect?
a. Some firms allowed their CEOs to backdate options that they were granted to an earlier period when the stock price was lower.
b. Backdating is completely inconsistent with the idea of granting options to encourage managers to focus on maximizing the stock price.
c. Firms readily promote their option compensation programs and are more than willing to acknowledge that the options are an expense.
d. All of the above are correct.
 
 
71.
Which of the following statements is least correct regarding corporations involved in international business transactions?
a. They may purchase currency put options to hedge future receivables denominated in a foreign currency.
b. They may purchase currency call options to hedge future payables denominated in a foreign currency.
c. They may purchase currency call options to hedge future receivables denominated in a foreign currency.
d. They benefit from currency put options if the currency’s value declines before the expiration date of the option.
 
 
 
 
 
 
 
 
 

72.
The writer of a put option is obligated to provide the specified financial instrument at the price specified by the option contract if the owner exercises the option.
a. True
b. False
 
 
 

 

1.
Ad advantage of a ____ over other interest rate swaps is that the fixed-rate payer has the flexibility to avoid exchanging future interest payments
 
 
2.
The advantage of rate-capped interest rate swap (relative to a plan vanilla swap) to the party exchanging fixed payments for floating payments is that
 
 
3.
​A firm is involved in an agreement whereby it makes payments in periods when a market interest rate rises above an interest rate level specified in the agreement. This means that the firm has
 
 
4.
After the credit crisis, new rules and regulations were issued to reform the swap markets. Which of the following is not one of the requirements of these new rules and regulations?
 
 
5.
AIG’s financial problems during the credit crisis were attributed to:
 
 
6.
​An equity swap involves the exchange of dividend payments for payments linked to the degree of change in a stock index.
 
 
7.
​An interest rate cap offers payments in periods when a specified interest rate index exceeds a specified floor interest rate.
 
 
8.
A(n) ____ swap allows the party making fixed payments to extend the swap period.
 
 
9.
A(n) ____ swap allows the party making fixed-rate payments to terminate the swap prior to maturity.
 
 
10.
A(n) ____ swap involves an exchange of interest payments over a swap period that does not begin until a specified future point in time
 
 
11.
A(n) ____ swap provides the party making the floating-rate payments with a right to terminate the swap.
 
 
12.
An arrangement that enables firms to exchange currencies at periodic intervals is called a(n)
 
 
13.
Assume a financial institution has rate-sensitive liabilities and rate-sensitive assets. If this institution negotiates a rate-capped swap its ____ payments will be capped, and it will ____ an up-front premium in exchange for the cap.
 
 
14.
Assume a U.S. savings institution funds its fixed-rate mortgages by attracting short-term deposits. If it engages in an interest rate swap, but the index on the swap does not move in perfect tandem with its cost of deposits, this reflects
 
 
15.
​A ____ swap involves an exchange of interest rate payments that does not begin until a specified future point in time.
 
 
16.
The Bank of Moronto has negotiated a plain vanilla swap whereby it will exchange fixed payments of 10 percent for floating payments equal to LIBOR plus 0.5 percent at the end of each of the next three years. In the first year, LIBOR is 8 percent; in the second year, 9 percent; in the third year, LIBOR is 7 percent. What is the total net payment the Bank of Moronto makes over the three-year period if the notional principal is $10 million?
 
 
17.
A common maturity of a credit default swap contract is:
 
 
18.
During the credit crisis, many mortgage-backed securities defaulted, generating large profits for sellers of credit default swaps and large losses for buyers of the swaps
 
 
19.
An equity swap involves the exchange of
 
 
20.
An equity swap involves the exchange of interest payments linked to the degree of change in a bond index.
 
 
21.
A financial institution may participate in the swaps markets by:
 
 
22.
Financial institutions primarily use interest rate swaps in a way that will ____ exposure to interest rate risk and ____ potential returns.
 
 
23.
Financial institutions such as U.S. savings institutions and commercial banks traditionally had fewer interest rate-sensitive ____ than ____ and therefore were adversely affected by ____ interest rates.
 
 
24.
Financial institutions with ____ interest rate-sensitive liabilities than assets are ____ affected by rising interest rates.
 
 
25.
A firm is involved in an agreement whereby it receives payments in periods when a market interest rate falls below an interest rate level specified in the agreement. This means that the firm has
 
 
26.
A firm is involved in an agreement whereby it receives payments in periods when a market interest rate rises above an interest rate level specified in the agreement. This means that the firm has
 
 
27.
A forward swap allows an institution to lock in the terms of the arrangement today, and the swap period begins immediately.
 
 
28.
​Hewitt Inc. has entered into an equity swap arrangement that allows it to swap a fixed interest rate of 8 percent in exchange for the rate of appreciation on the Dow Jones Industrial Average each year over a three-year period. The notional principal is $1 million. If the Dow depreciates by 1 percent over the year, Hewitt will
 
 
29.
If a firm negotiates a plain vanilla swap, it will provide 
____ payments in exchange for ____ payments.
 
 
30.
If a large bank that has taken numerous swap positions and guaranteed many other swap positions fails, there could be several defaults on swap payments.
 
 
31.
If a U.S. institution in a forward swap would like to lock in the fixed rate that it will pay when the swap period begins, it is probably concerned that interest rates will ____; the counterparty is likely adversely affected by ____ interest rates.
 
 
32.
In a ____, a buyer makes periodic payments to a seller in exchange for protection against the possible default of debt securities specified in the contract.
 
 
 
 
 
 
 
 
 
 
 

33.
In a period when interest rates are expected to rise, ____ institutions will want a fixed-for-floating swap, and the fixed rate specified on interest rate swaps will be ____ under these conditions.
 
 
34.
In a swap arrangement, the most common index used for floating-rate payments is the
 
 
35.
​Interest rate ____ are interest rate derivative instruments that are normally classified separately from interest rate swaps.
 
 
36.
An interest rate collar involves the ____ of an interest rate cap and the simultaneous ____ of an interest rate
 
 
37.
An interest rate collar involves the purchase of an interest rate cap and the simultaneously sale of an interest rate floor.
 
 
38.
Interest rate floors are commonly used to hedge against lower interest rates.
 
 
39.
An interest rate swap agreement indicates the ____ value, is represents the principle amount to which interest rates are applied to determine the interest payments involved.
 
 
40.
Interest rate swaps are rarely used by companies that issue bonds.
 
 
41.
Lizard National Bank purchases a three-year interest rate cap for a fee of 2 percent of notional principal valued at $50 million, with an interest rate ceiling of 11 percent and LIBOR as the index representing the market interest rate. LIBOR is 9 percent, 12 percent, and 13 percent at the end of each of the next three years, respectively. The total payments received (or paid) by Lizard, including the initial fee, are $____.
 
 
42.
The London Interbank Offer Rate (LIBOR) varies among currencies.
 
 
43.
The option on a callable swap would most likely by exercised if interest rates
 
 
44.
The option on a putable swap would most likely be exercised if rates
 
 
45.
A plain vanilla swap enables firms to exchange ____ for ____.
 
 
46.
A putable swap gives the party making the fixed-rate payments the right to terminate the swap.
 
 
47.
A rate-capped swap may limit the fixed-rate payer’s ability to effectively hedge against interest rate risk.
 
 
48.
____ risk in a swap is typically not overwhelming because the affected party can simply discontinue its payments to the other party.
 
 
49.
____ risk prevents an interest rate swap from completely eliminating a financial institution’s exposure to interest rate risk.
 
 
50.
The same types of risks that apply to interest rate swaps may also apply to currency swaps, except that currency swaps are not subject to basis risk
 
 
51.
Savings institutions participate in the swap market primarily to
 
 
52.
Sovereign risk differs from credit risk because it is dependent on the financial status of the government rather than the counterparty itself.
 
 
53.
A ____ swap involves the exchange of fixed-rate payments for floating-rate payments that are capped.
 
 
54.
Swap transactions are only used when
 
 
55.
Systemic risk is the risk that a firm involved in an interest rate swap may not meet its payment obligations.
 
 
56.
​The most common proxy for the benchmark rate from which a floating-rate payment is determined is the prime rate.
 
 
57.
​The primary purpose of interest rate swaps is to reduce exchange rate risk.
 
 
58.
The typical purchaser of an interest rate cap is a financial institution that is ____ affected by ____ interest rates.
 
 
59.
When a bank participates in a swap of fixed interest rate payments for floating-rate payments, or a swap of currencies, it
 
 
60.
Which of the following is not a reason why financial institutions engage in interest rate swaps?
 
 
61.
Which of the following is not a typical provision of an interest rate swap?
 
 
 
 
 
 
 
 
 

62.
Which of the following statements is correct?
 
 
 

 

1.
According to interest rate parity, if the interest rate in a foreign country is ____ than in the home country, the forward rate of the foreign country will have a ____.

a. higher; discount
b. lower; premium
c. higher; premium
d. A and B
 
 
2.
The act of capitalizing on the discrepancy between the forward rate premium and the interest rate differential is called

a. triangular arbitrage.
b. locational arbitrage.
c. covered interest arbitrage.
d. interest rate parity.
 
 
3.
The ____ allowed for the devaluation of the dollar in 1971.

a. Bretton Woods Agreement
b. Louvre Accord
c. Smithsonian Agreement
d. none of the above
 
 
4.
A(n) ____ in the supply of euros for sale will cause the euro to ____.

a. increase; appreciate
b. increase; depreciate
c. decrease; depreciate
d. none of the above
 
 
5.
___ are not foreign exchange derivatives.

a. Forward contracts
b. Currency futures contracts
c. Currency swaps
d. Currency options
e. All of the above are foreign exchange derivatives.
 
 
6.
Assume an equilibrium state in which European inflation and U.S. inflation are both 4 percent. If U.S. inflation suddenly decreased to 2 percent, the euro will ____ against the dollar by approximately ____ percent, according to purchasing power parity.

a. appreciate; 2
b. depreciate; 2
c. appreciate; 4
d. depreciate; 4
e. none of the above
 
 
7.
Assume interest rate parity exists. If the spot rate on the British pound is $2 and the 1-year British interest rate is 7 percent, and the 1-year U.S. interest rate is 11 percent, what is the pound’s forward discount or premium?

a. 3.74 percent premium
b. 3.74 percent discount
c. 3.60 percent premium
d. 3.60 percent discount
 
 
8.
Assume that a British pound put option has a premium of $.03 per unit, and an exercise price of $1.60. The present spot rate is $1.61. The expected future spot rate on the expiration date is $1.52. The option will be exercised on this date if at all. What is the expected per unit net gain (or loss) resulting from purchasing the put option?

a. $.01 loss
b. $.09 loss
c. $.09 gain
d. $.05 gain
 
 
9.
Assume the following information.

- Interest rate on borrowed euros is 5 percent annualized

- Interest rate on dollars loaned out is 6 percent annualized

- Spot rate for €0.83 per dollar (one € = $1.20)

- Expected spot rate in five days is €0.85 per dollar

- Alonso Bank can borrow €10 million

What is the euro profit to Alonso Bank over the five-day period from shorting euros and going long on dollars?

a. €200,311.11
b. €207,111.11
c. €201,555.56
d. none of the above
 
 
10.
Assume the following information.

- Interest rate on borrowed euros is 5 percent annualized.

- Interest rate on dollars loaned out is 6 percent annualized.

- Spot rate is 1.10 euros per dollar (one euro = $0.909).

- Expected spot rate in five days is 1.15 euros per dollar.

- Fabrizio Bank can borrow 10 million euros.

If Fabrizio Bank attempts to capitalize on the above information, its profit over the five-day period is

a. 2,653,597.22 euros.
b. 455,266.81 euros.
c. 452,426.04 euros.
d. none of the above
 
 
11.
At any given point in time, the price at which banks will buy a currency is ____ the price at which they sell it.

a. higher than
b. lower than
c. the same as
d. none of the above
 
 
 
 
 
 
 
 
 
 

12.
Bank A asks $.555 for Swiss francs and Banks B and C are willing to pay $.557 for francs. An institution could capitalize on these differences by engaging in

a. covered interest arbitrage.
b. triangular arbitrage.
c. locational arbitrage.
d. witching hour arbitrage.
 
 
13.
Beginning with an equilibrium situation, if European inflation suddenly ____ than U.S. inflation, this forced ____ pressure on the value of the euro.

a. becomes much higher; upward
b. becomes much higher; downward
c. becomes much less; upward
d. becomes much less; downward
e. B and C
 
 
14.
The Bretton Woods Era was the era

a. of free-floating exchange rates.
b. of floating rates without boundaries, but subject to government intervention.
c. in which governments maintained exchange rates within 1 percent of a specified rate.
d. In which exchange rates were maintained within 10 percent of a specified rate.
 
 
15.
Currency futures contracts differ from forward contracts in that they

a. are an obligation.
b. are not an obligation.
c. are standardized.
d. can specify any amount and maturity date.
 
 
16.
The devaluation of a country’s currency:

a. makes foreign products more expensive for consumers in that country.
b. increases foreign demand for that country’s exports.
c. can lead to deflation in that country.
d. A and B
 
 
17.
The exchange rate between two foreign (nondollar) currencies is known as a(n):

a. indirect dollar rate.
b. forward rate.
c. cross-exchange rate.
d. derived exchange rate.
 
 
18.
____ forecasting involves the use of historical exchange rate data to predict future values.

a. Technical
b. Fundamental
c. Market-based
d. Mixed
 
 
19.
____ forecasting is usually based on either the spot rate or the forward rate.

a. Technical
b. Fundamental
c. Market-based
d. Mixed
 
 
20.
Generally, a ____ home currency can ____ domestic economic growth.

a. weak; dampen
b. strong; stimulate
c. strong; dampen
d. A and B
 
 
21.
A ____ home currency can ____ domestic inflation.

a. strong; increase
b. weak; decrease
c. strong; decrease
d. A and B
 
 
22.
If a commercial bank expects the euro to appreciate against the dollar, it may take a ____ position in euros and a ____ position in dollars.

a. short; short
b. long; short
c. short; long
d. long; long
 
 
23.
If a firm planning to hedge receivables is certain of the future direction a spot rate will move, and requires a tailor-made hedge in terms of amount and maturity date, it should use a

a. call options contract traded on an exchange.
b. futures contract traded on an exchange.
c. forward contract.
d. put options contract traded on an exchange.
 
 
24.
If British interest rates suddenly increase substantially relative to U.S. interest rates, the demand by U.S. investors for British pounds ____, the supply of British pounds to be sold in exchange for dollars ____, and the British pound will ____.

a. increases; decreases; appreciate
b. increases; decreases; depreciate
c. decreases; increases; appreciate
d. decreases; increases; depreciate
e. none of the above
 
 
25.
If European inflation suddenly becomes much higher than U.S. inflation, the U.S. demand for European goods will ____. In addition, the supply of euros to be sold for dollars will ____; both forces will place ____ pressure on the value of the euro.

a. increase; decline; upward
b. increase; decline; downward
c. decrease; increase; upward
d. decrease; increase; downward
e. none of the above
 
 
 
 
 
 
 
 
 

26.
If the demand for British pounds ____, the pound will ____, other things being equal.

a. increases; appreciate
b. decreases; appreciate
c. increases; depreciate
d. B and C
 
 
27.
If the forward rate of a foreign currency ____ the existing spot rate, the forward rate will exhibit a ____.

a. exceeds; discount
b. is below; premium
c. is below; discount
d. A and B
 
 
28.
If the spot rate of the British pound is $2, and the 180-day forward rate is $2.05, what is the annualized premium or discount?

a. 2.5 percent discount
b. 2.5 percent premium
c. 10 percent premium
d. 5 percent discount
e. 5 percent premium
 
 
29.
If the spot rate ____ the exercise price, a currency ____ option would not be exercised.

a. remains below; call
b. remains below; put
c. remains below; put
d. A and B
 
 
30.
If the U.S. government imposed trade restrictions on U.S. imports, this would ____ the U.S. demand for foreign currencies, and would place ____ pressure on the values of foreign currencies (with respect to the dollar).

a. increase; upward
b. increase, downward
c. limit; upward
d. limit; downward
 
 
31.
If U.S. inflation suddenly becomes much higher than European inflation, the U.S. demand for European goods will ____. In addition, the supply of euros to be sold for dollars will ____; both forces will place ____ pressure on the value of the euro.

a. increase; decline; upward
b. increase; decline; downward
c. decrease; increase; upward
d. decrease; increase; downward
e. none of the above
 
 
32.
If U.S. interest rates suddenly become much higher than European interest rates (and if it does not cause concern about higher inflation there), the U.S. demand for euros would ____, and the supply of euros to be exchanged for dollars would ____, other factors held constant.

a. increase; increase
b. increase; decrease
c. decrease; increase
d. decrease; decrease
 
 
33.
In a(n) ____ exchange rate system, the foreign exchange market is totally free from government intervention.

a. pegged
b. dirty floating
c. freely floating
d. Bretton Woods
e. none of the above
 
 
34.
In the Wall Street Journal, you observe that the British pound (£) is quoted for $1.67. The Australian dollar (A$) is quoted for $0.62. What is the value of the Australian dollar in British pounds?

a. A$2.69
b. £0.37
c. £2.69
d. A$0.37
e. none of the above
 
 
35.
In the Wall Street Journal, you observe that the British pound (£) is quoted for $1.65. The Australian dollar (A$) is quoted for $0.60. What is the value of the Australian dollar in British pounds?

a. A$2.75
b. A$0.36
c. £2.75
d. £0.36
e. none of the above
 
 
36.
Purchasing Power Parity suggests that the exchange rate will on average change by a percentage that reflects the ____ differential between two countries.

a. income
b. interest rate
c. inflation
d. tax
 
 
37.
____ serve as financial intermediaries in the foreign exchange market by buying or selling currencies to accommodate customers.

a. Commercial banks
b. International mutual funds
c. Insurance companies
d. Pension funds
e. All of the above
 
 
38.
____ serve as financial intermediaries in the foreign exchange market by buying or selling currencies to accommodate customers.

a. Pension funds
b. International mutual funds
c. insurance companies
d. Commercial banks
e. None of the above
 
 
39.
The speculative risk of purchasing a ____ is that the foreign currency value ____ over time.

a. put option; increases
b. put option; decreases
c. call option; increases
d. futures contract; increases
 
 
 
 
 
 
 
 
 

40.
A speculator who expects the euro to depreciate might:

a. sell euros forward and then purchase them in the spot market just before fulfilling the forward obligation.
b. purchase euros forward and, when they are received, sell them in the spot market.
c. purchase futures contracts on euros and, when the euros are received, sell them in the spot market.
d. all of the above
 
 
41.
The supply and demand for a currency are influenced by all of the following, except

a. differential interest rates.
b. differential inflation rates.
c. direct government intervention.
d. indirect government intervention.
e. The supply and demand for a currency are affected by all of the above.
 
 
42.
A system whereby exchange rates are market determined without boundaries but subject to government intervention is called

a. a dirty float.
b. a free float.
c. the gold standard.
d. the Bretton Woods era.
 
 
43.
A system whereby one currency is maintained within specified boundaries of another currency or unit of account is a

a. pegged system.
b. free float.
c. dirty float.
d. managed float.
 
 
44.
When a government influences factors, such as inflation, interest rates, or income, in order to affect currency’s value, this is an example of

a. direct intervention.
b. indirect intervention.
c. a freely floating system.
d. a pegged system.
 
 
45.
Which of the following is most likely to provide currency forward contracts to their customers?

a. commercial banks
b. international mutual funds
c. brokerage firms
d. insurance companies
 
 
46.
Which of the following is not a method of forecasting exchange rate volatility?

a. using the volatility of historical exchange rate movements
b. using a time series of volatility patterns in previous periods
c. using the volatility of future exchange rate movements
d. using the exchange rate’s implied standard deviation
 
 
47.
Which of the following is the least feasible strategy for a speculator who expects the Australian dollar to depreciate?

a. sell Australian dollars forward and then purchase them in the spot market just before fulfilling the forward obligation
b. sell futures contracts on Australian dollar; purchase Australian dollars in the spot market just before fulfilling the futures obligation
c. purchase put options on Australian dollars, at some point before the expiration date, when the spot rate is less than the exercise price, purchase Australian dollars in the spot market and then exercise the put option
d. purchase call options on Australian dollars; at some point before the expiration date, exercise the call option and then sell the Australian dollars received in the spot market
e. All of the above are possible strategies for a speculator who expects the Australian dollar to depreciate.
 
 
48.
Which of the following statements is incorrect?

a. Central banks often consider adjusting a currency’s value to influence economic conditions.
b. If the U.S. central bank wishes to stimulate the economy, it could weaken the dollar.
c. A weaker dollar could cause U.S. inflation by reducing foreign competition.
d. Direct intervention occurs when the central bank influences the factors that determine the dollar’s value.
 
 
49.
Which of the following statements is incorrect?

a. Forward contracts are contracts typically negotiated with a commercial bank that allow the purchase or sale of a specified amount of a particular foreign currency at a specified exchange rate on a specified future date.
b. The forward market is located in New York City.
c. Many of the commercial banks that offer foreign exchange on a spot basis also offer forward transactions for the widely traded currencies.
d. Forward contracts can hedge a corporation’s risk that a currency’s value may appreciate over time.
 
 
 
 
 
 
 
 
 

 

1.
Which of the following statements is incorrect with respect to the federal funds market?
a. ​It allows depository institutions to accommodate the short-term liquidity needs of other financial institutions.
b. ​Federal funds purchased represent an asset to the borrowing bank and a liability to the lending bank that sells them.
c. ​The federal funds market is typically most active on Wednesday, because that is the final day of each particular settlement period for which each bank must maintain a specified volume of reserves required by the Fed.
d. ​All of the above are true with respect to the federal funds market.
 
 
2.
​From a bank manager’s perspective, the differential in interest between a bank’s loans and its deposits;
a. ​must not exceed the federal funds rate.
b. ​is called the primary credit lending rate.
c. ​must be sufficient to cover the bank’s other expenses and generate a reasonable profit for the bank’s owners.
d. ​must be sufficient to cover the bank’s deposit insurance premiums and its reserve requirements at the Federal Reserve.
 
 
3.
​A banks uses of funds represent liabilities of a bank.
a. ​True
b. ​False
 
 
4.
​All other things being equal, when banks issue new stock, they
a. ​increase reported earnings per share.
b. ​decrease their ability to absorb operating losses.
c. ​dilute the ownership of the bank.
d. ​A and B
 
 
5.
​A ____ loan may be especially appropriate when a firm wishes to avoid adding more debt to its balance sheet.
a. ​term
b. ​bullet
c. ​direct lease
d. ​revolving credit
 
 
6.
A(n) ____ account provides checking and debit card services as well as interest.
a. ​demand deposit
b. ​negotiable order of withdrawal (NOW)
c. ​passbook savings
d. ​time deposit
 
 
7.
​____ are the largest bank source of funds as a percentage of total liabilities.
a. ​Small-denomination time deposits
b. ​Money market deposit accounts (MMDAs)
c. ​Transaction deposits
d. ​Borrowed funds
e. ​Savings deposits (including MMDAs)
 
 
8.
​Bank capital represents funds obtained through ____ and through ____.
a. ​issuing stock; offering long-term CDs
b. ​issuing repurchase agreements; issuing bonds
c. ​issuing stock; retaining earnings
d. ​offering long-term CDs; issuing bonds
 
 
9.
The bank holding company structure allows more flexibility to borrow funds, issue stock, repurchase the company’s own stock, and acquire other firms.
a. ​True
b. ​False
 
 
10.
Bank rates on credit card balances are usually similar to the rate charged on business loans.
a. ​True
b. ​False
 
 
11.
Bank regulators are concerned that banks may maintain a higher level of capital than they should and have therefore imposed capital requirements on them.
a. ​True
b. ​False
 
 
12.
Banks sometimes need funds and sometimes have excess funds available. Which of the following is commonly a source of bank funds and a use of bank funds?
a. ​MMDAs
b. ​federal funds
c. ​the discount window
d. ​retail CDs
 
 
13.
A bank’s sources of funds represent liabilities or equity of the bank.
a. ​True
b. ​False
 
 
14.
​Banks will not accept intangible assets, such as patents and brand names, as collateral for commercial loans.
a. ​True
b. ​False
 
 
15.
Because U.S. dollars are widely used as an international medium of exchange, the Eurodollar market is very active.
a. ​True
b. ​False
 
 
16.
Before establishing foreign branches, a U.S. bank must obtain the approval of the:
a. ​U.S. Treasury
b. ​U.S. Commerce Department.
c. ​Federal Deposit Insurance Corporation.
d. ​Federal Reserve
 
 
17.
​Cash held ____ represents the major portion of a bank’s required reserves.
a. ​at other commercial banks
b. ​in a bank’s vault
c. ​on deposit at the federal funds window
d. ​on deposit with the Board of Governors
 
 
18.
A commercial bank can be a lender or a borrower when using repurchase agreements and loans in the federal funds market.
a. ​True
b. ​False
 
 
19.
Commercial banks are not allowed to invest in
a. ​Treasury securities
b. ​Freddie Mac securities.
c. ​Fannie Mae securities.
d. ​Banks can invest in all securities mentioned above.
 
 
 
 
 
 
 
 
 
 
 
 
 

20.
Commercial banks have expanded in recent years not only by acquiring other banks but also by acquiring other types of financial service firms.
a. ​True
b. ​False
 
 
21.
The federal funds rate is ____ the yield on a Treasury security with a similar term remaining until maturity.
a. ​substantially above
b. ​substantially below
c. ​close to
d. ​none of the above; the rate is much higher than the Treasury yield in some periods and much lower than the Treasury yield in other periods
 
 
22.
The federal funds rate is typically ____ the primary credit lending rate.
a. ​greater than
b. ​less than
c. ​equal to
d. ​none of the above
 
 
23.
The Federal Reserve provides loans to banks in order to
a. ​resolve permanent shortages of funds experienced by banks.
b. ​resolve temporary shortages of funds experienced by banks.
c. ​finance the shortages of funds of finance companies.
d. ​none of the above
 
 
24.
A financial institution is likely to call a callable CD before its maturity if interest rates have risen since the CD was issued
a. ​True
b. ​False
 
 
25.
The five largest banks in the United States account for about one-tenth of all assets in U.S. banks.
a. ​True
b. ​False
 
 
26.
For any given bank, federal funds ____ represent a(n) ____.
a. ​purchased; asset
b. ​sold; liability
c. ​purchased; liability
d. ​A and B
 
 
27.
A forward contract on currency:
a. ​is a way to hedge credit (default) risk.
b. ​is used to swap fixed interest payments in euros for variable interest payments in dollars.
c. ​is an agreement between a customer and a bank to exchange one currency for another on a specified date at a specified exchange rate.
d. ​is an agreement between a customer and a bank to exchange one currency for another on a specified date at whatever the exchange rate is on that day.
 
 
28.
In a loan participation arrangement, normally all of the participating banks are exposed to credit (default) risk.
a. ​True
b. ​False
 
 
29.
In a revolving credit loan, the bank typically charges businesses a commitment fee on any unused funds.
a. ​True
b. ​False
 
 
30.
​In a standby letter of credit, a bank agrees to:
a. ​charge a fixed interest rate for a line of credit for a specified period.
b. ​back a customer’s obligation to a third party.
c. ​provide a customer with funds up to a specified maximum amount over a specified period.
d. ​service credit card loans originated by another bank
 
 
31.
The interest rate banks charge on business loans is known as the
a. ​federal funds rate.
b. ​primary credit lending rate.
c. ​prime rate
d. ​call money rate.
 
 
 
 
 
 
 
 
 

32.
The interest rate charged on loans between depository institutions is commonly referred to as the
a. ​federal funds rate.
b. ​discount rate.
c. ​primary credit lending rate.
d. ​none of the above
 
 
33.
​____ is (are) not a major source of funds for commercial banks.
a. ​Deposit accounts
b. ​Borrowed funds
c. ​Commercial loans
d. ​Bank capital
e. ​All of the above are sources of funds for commercial banks.
 
 
34.
A ____ is a time deposit offered by some large banks to corporations, with a specific maturity date, a minimum deposit of $100,000 or more, and a secondary market.
a. ​retail CD
b. ​negotiable CD
c. ​market CD
d. ​protective CD
 
 
35.
A ____ is a type of loan commitment.
a. ​standby letter of credit (SLC)
b. ​note issuance facility (NIF)
c. ​forward contract
d. ​swap contract
e. ​none of the above
 
 
36.
Like other market interest rates, the federal funds rate moves in reaction to changes in demand or supply of funds or both.
a. ​True
b. ​False
 
 
37.
​____ loans are primarily used to finance the purchase of fixed assets.
a. ​Term
b. ​Working capital
c. ​Informal line of credit
d. ​Revolving credit
 
 
38.
The main use of bank funds is for
a. ​loans
b. ​investment securities.
c. ​fixed assets.
d. ​repurchase agreements.
 
 
39.
Money market deposit accounts differ from conventional time deposits in that they
a. ​specify a maturity.
b. ​offer limited check-writing privileges.
c. ​are less liquid.
d. ​none of the above
 
 
40.
Money market deposit accounts (MMDAs)
a. ​require a maturity of six months or longer.
b. ​allow a limited number of checks to be written against the account.
c. ​pay a higher interest rate than CDs.
d. ​none of the above
 
 
41.
The most common way for U.S. commercial banks to expand internationally is by purchasing banks in other countries.
a. ​True
b. ​False
 
 
42.
Obtaining funds through ____ is not a common way for banks to satisfy a temporary deficiency of funds.
a. ​issuing bonds
b. ​the federal funds market
c. ​repurchase agreements
d. ​borrowing from the Federal Reserve
 
 
43.
The operations, management, and regulation of a commercial bank are the same irrespective of the types of services offered.
a. ​True
b. ​False
 
 
44.
The primary credit lending rate is determined by
a. ​the Federal Reserve.
b. ​Congress.
c. ​the Treasury.
d. ​the President of the United States.
 
 
45.
Proprietary trading is generally less risky than a bank’s lending operations.
a. ​True
b. ​False
 
 
46.
Protective covenants impose conditions that require the bank to provide additional loans to a borrower to protect the borrower from going bankrupt.
a. ​True
b. ​False
 
 
47.
A single loan in the federal funds market is usually for ____; when a bank sells a single repurchase agreement, the maturity is usually ____.
a. ​just a few days; one year or more
b. ​several weeks; one year or more
c. ​several weeks; just a few days
d. ​just a few days; just a few days
 
 
 
 
 
 
 
 
 

48.
States may enact _______ to set a maximum on the rate of interest that banks can charge.
a. ​leveraged loan laws
b. ​credit protection laws
c. ​consumer interest laws
d. ​usury laws
 
 
49.
​The interest rate charged on loans from the Federal Reserve to banks is commonly referred to as the
a. ​federal funds rate.
b. ​primary credit lending rate.
c. ​repo rate
d. ​none of the above
 
 
50.
Transaction deposits do not include
a. ​demand deposits.
b. ​NCDs
c. ​NOW accounts
d. ​All of the above are transactions deposits.
 
 
51.
When a bank engages in proprietary trading, it:
a. ​uses its own funds to make investments.
b. ​is not subject to regulations.
c. ​lends the funds in the federal funds market.
d. ​normally uses the funds to build its capital.
 
 
52.
​When a bank in need of funds for a few days sells some of its government securities to a corporation with a temporary excess of funds, then buys them back shortly thereafter, this is a
a. ​federal funds loan.
b. ​discount window loan.
c. ​repurchase agreement.
d. ​commercial paper transaction.
 
 
53.
When a bank obtains funds through a ____, the provider of the funds receives collateral.
a. ​retail CD
b. ​NOW account
c. ​repurchase agreement
d. ​money market deposit account
 
 
54.
When a bank obtains funds through ____, households are not a common provider of the funds.
a. ​NOW accounts
b. ​retail CDs
c. ​passbook savings accounts
d. ​NCDs
 
 
55.
When banks need funding for just a few days, they would most likely
a. ​issue bonds and then call them.
b. ​issue stock and then repurchase it.
c. ​borrow in the federal funds market.
d. ​issue NCDs.
 
 
56.
When banks obtain funds in the federal funds market, the providers of the funds are
a. ​other depository institutions.
b. ​nonfinancial corporations.
c. ​consumers.
d. ​the Federal Reserve.
 
 
57.
Which of the following is most appropriate for a business that may experience a sudden need for funds but does not know precisely when?
a. ​working capital loan
b. ​direct lease loan
c. ​term loan
d. ​informal line of credit
 
 
58.
Which of the following is not an off-balance sheet activity?
a. ​highly leveraged transactions (HLTs)
b. ​standby letters of credit
c. ​forward contracts
d. ​swap contracts
 
 
59.
​Which of the following statements is incorrect?
a. ​Banks have expanded their business across services over time.
b. ​Acquisitions have been a convenient method for banks to grow quickly and capitalize on economies of scale.
c. ​The banking industry has become less concentrated in recent years.
d. ​All of the statements above are correct.
 
 
60.
Which of the following types of deposits does not allow any check-writing privileges?
a. ​NOW accounts
b. ​money market deposit accounts (MMDAs)
c. ​retail CDs
d. ​All of the above allow checks to be written.
 
 
 
 
 
 
 
 
 

61.
With a _________, a bank agrees to purchase a firm’s __________ if the firm cannot place the issue in the market at an acceptable interest rate.
a. ​note issuance facility; commercial paper
b. ​note issuance facility; bonds
c. ​paper placement commitment; commercial paper
d. ​bond placement commitment; bonds
 
 
62.
The yield on repurchase agreements is slightly higher than the federal funds rate at any given point in time.
a. ​True
b. ​False
 
 
 

 

1.
​A bank has a return on assets of 2 percent, $40 million in assets, and $4 million in equity. What is the return on equity?

a. 
​10 percent

b. 
​.2 percent

c. 
​2 percent

d. 
​20 percent

e. 
​none of the above
 
 
2.
​A(n) ____________ is an agreement for a fee to receive payments when the interest rate of a particular security rises above a specified level by a specified date.

a. 
​interest rate cap

b. 
​interest rate futures contract

c. 
​interest rate swap

d. 
​maximum rate contract
 
 
3.
​A positive gap (or gap ratio of more than 1.00) suggests that rate-sensitive liabilities exceed rate-sensitive assets.

a. 
​True

b. 
​False
 
 
4.
​Assume a bank accepts deposits in Australian dollars (A$) and makes some fixed-rate loans in British pounds. Which of the following would reduce the bank’s profit margin?

a. 
​The A$ appreciates against the pound.

b. 
​The A$ is stable against the pound.

c. 
​The A$ depreciates against the pound.

d. 
​British interest rates increase.

e. 
​C and D
 
 
5.
As the secondary market for loans has become active, banks are more able to satisfy their liquidity needs with a ____ proportion of loans while achieving ____ profitability.

a. 
​higher; higher

b. 
​lower; lower

c. 
​higher; lower

d. 
​lower; higher
 
 
6.
Bank A has interest revenues of $4 million, interest expenses of $5 million, and assets totaling $20 million. Bank A’s net interest margin is

a. 
​$1 million.

b. 
​-$1 million.

c. 
​-5 percent.

d. 
​5 percent.
 
 
7.
A bank can usually simultaneously maximize its return on assets and minimize credit risk.

a. 
​True

b. 
​False
 
 
 
 
 
 
 
 
 
 
 

8.
A bank has the following asset and liability portfolios. What is the gap?


 
 
9.
Banks are more liquid as a result of securitization because it allows them to request repayment of the loan principal from the borrower upon demand.
 
 
10.
Banks can improve their liquidity position by restructuring their asset portfolio to contain fewer ____ and more ____.

a. 
​excess reserves; Treasury bills

b. 
​Treasury bonds; corporate bonds

c. 
​loans; Treasury bills

d. 
​none of the above
 
 
11.
Banks can increase their potential interest revenues by restructuring their asset portfolio to contain fewer ____ and more ____.

a. 
​Treasury bonds; commercial loans

b. 
​Treasury bonds; excess reserves

c. 
​consumer loans; Treasury bills

d. 
​none of the above
 
 
12.
​Banks can reduce their credit risk by restructuring their asset portfolio to contain fewer ____ and more ____.

a. 
​Treasury bonds; corporate bonds

b. 
​Treasury bonds; municipal bonds

c. 
​Treasury bonds; commercial loans

d. 
​none of the above
 
 
 
 
 
 
 
 
 
 

13.
​Banks can resolve cash deficiencies by

a. 
​creating additional liabilities

b. 
​selling assets

c. 
​buying back common stock

d. 
​increasing dividend payouts

e. 
​A or B
 
 
14.
Banks generally ____ loans and ____ their purchases of low-risk securities when the economy is weak.

a. 
​increase; increase

b. 
​reduce; reduce

c. 
​increase; reduce

d. 
​reduce; increase
 
 
15.
Banks increase their risk by increasing their capital as a percentage of assets

a. 
​True

b. 
​False
 
 
16.
A bank’s net interest margin is commonly defined as

a. 
​interest revenues minus interest expenses.

b. 
​(interest revenues minus interest expenses)/total assets.

c. 
​(interest revenues minus interest expenses)/total liabilities.

d. 
​(interest revenues minus interest expenses)/capital.
 
 
17.
Banks tend to focus their loans in one industry so that they can specialize on that industry and reduce the credit risk of their loan portfolio.

a. 
​True

b. 
​False
 
 
18.
​Banks would reduce their liquidity by restructuring their asset portfolio to contain fewer ____ and more ____.

a. 
​Treasury securities; excess reserves

b. 
​loans; Treasury securities

c. 
​corporate bonds; Treasury securities

d. 
​none of the above
 
 
 
 
 
 
 
 
 

19.
Because riskier assets offer ____ returns, a bank’s strategy to increase its return will typically entail a(n) ____ in the overall credit risk of its asset portfolio.

a. 
​lower; increase

b. 
​lower; decrease

c. 
​higher; increase

d. 
​higher; decrease

e. 
​none of the above
 
 
20.
A common method for banks to reduce their credit risk is to

a. 
​specialize in loans to just one or a few particular industries in which they have expertise in assessing creditworthiness.

b. 
​specialize in loans to companies whose earnings patterns are quite similar over time.

c. 
​A and B

d. 
​none of the above
 
 
21.
Crazer Bank has a profit after taxes of $2 million, total assets of $100 million, and shareholder’s equity of $10 million. Crazer’s return on equity (ROE) is ____ percent.

a. 
​18

b. 
​210

c. 
​15

d. 
​20

e. 
​none of the above
 
 
22.
. ​Durango Bank has $2 million in rate-sensitive liabilities and $3 million in rate-sensitive assets. Durango’s gap is ____, and Durango is probably more concerned about a(n) ____ in interest rates.

a. 
​$1 million; increase

b. 
​$1 million; decrease

c. 
​$1 million; increase

d. 
​$1 million; decrease

e. 
​none of the above
 
 
23.
The duration of zero-coupon bonds will be ____ the duration of coupon bonds with the same maturity.

a. 
​lower than

b. 
​higher than

c. 
​the same as

d. 
​A or B, depending on the size of the coupon payment
 
 
 
 
 
 
 
 
 

24.
During a period of ____ interest rates, a bank’s net interest margin will likely ____ if its liabilities are more rate sensitive than its assets

a. 
​decreasing; decrease

b. 
​increasing; increase

c. 
​decreasing; increase

d. 
​increasing; decrease

e. 
​answers C and D are correct
 
 
25.
During a period of rising interest rates, a bank’s net interest margin will likely decline if it has a large amount of

a. 
​rate-sensitive assets and no rate-sensitive liabilities.

b. 
​rate-sensitive liabilities and no rate-sensitive assets.

c. 
​loans to technology firms.

d. 
​real estate loans.
 
 
26.
During a period of rising interest rates, a bank’s net interest margin will likely ____ if its liabilities are ____ its assets.

a. 
​increase; more rate sensitive than

b. 
​decrease; more rate sensitive than

c. 
​increase; equally rate sensitive as

d. 
​decrease; equally rate sensitive as
 
 
27.
Each bank may have its own classification system of interest rate sensitivity, because there is no perfect measurement of the gap.

a. 
​True

b. 
​False
 
 
28.
An effective way to align bank managers’ interests with shareholders’ goal of higher returns is to compensate the managers with fixed salaries without a bonus.

a. 
​True

b. 
​False
 
 
29.
Floating-rate loans cannot completely eliminate interest rate risk; if the cost of funds is changing more frequently than the rate on assets, the bank’s net interest margin is still affected by interest rate fluctuations.

a. 
​True

b. 
​False
 
 
30.
Floating-rate loans completely eliminate interest rate risk.

a. 
​True

b. 
​False
 
 
31.
For a commercial bank, when the average duration of assets exceeds the average duration of liabilities, the duration gap is

a. 
​zero

b. 
​positive.

c. 
​negative.

d. 
​B or C
 
 
 
 
 
 
 
 
 

32.
For most banks, the average duration of assets ____ the average duration of liabilities, so the duration gap is ____.

a. 
​exceeds; zero

b. 
​exceeds; negative

c. 
​exceeds; positive

d. 
​is less than; negative
 
 
33.
​For most banks, the average duration of liabilities exceeds the average duration of assets, so the duration gap is positive.

a. 
​True

b. 
​False
 
 
34.
A gap ratio of less than one suggests that

a. 
​rate-sensitive assets exceed rate-sensitive liabilities.

b. 
​an increase in interest rates would increase the bank’s net interest margin.

c. 
​rate-sensitive liabilities exceed rate-sensitive assets.

d. 
​a decrease in interest rates would decrease the bank’s net interest margin.

e. 
​B and D
 
 
35.
The greater the ____, the greater the amount of assets per dollar’s worth of equity.

a. 
​leverage measure

b. 
​ratio of equity to debt

c. 
​capital ratio

d. 
​proportion of loans to securities in the asset portfolio
 
 
36.
If a bank attempts to reduce exposure to interest rate risk by replacing long-term marketable securities with more floating-rate commercial loans, it is likely that the bank’s

a. 
​credit risk would decrease.

b. 
​credit risk would increase.

c. 
​liquidity risk would increase.

d. 
​liquidity risk would decrease.

e. 
​B and C
 
 
37.
If a bank desires to maximize its net interest margin, it would best achieve its goal by attempting to obtain most of its funds through ____ and use most of its funds for ____ (assuming that all loans will be repaid).

a. 
​traditional demand deposits; commercial loans

b. 
​traditional demand deposits; consumer loans

c. 
​NOW accounts; consumer loans

d. 
​NOW accounts; commercial loans
 
 
 
 
 
 
 
 
 

38.
If a bank expects interest rates to consistently ____ over time, it will consider allocating most funds to rate-____ assets.

a. 
​decrease; sensitive

b. 
​decrease; insensitive

c. 
​increase; insensitive

d. 
​none of the above
 
 
39.
​If a bank expects interest rates to consistently ____ over time, it will consider allocating most of its funds to rate-____ assets.

a. 
​decrease; sensitive

b. 
​increase; insensitive

c. 
​increase; sensitive

d. 
​answers A and B are correct

e. 
​none of the above
 
 
40.
. ​If a bank has a ____ duration gap, its average asset duration is probably ____ than its liability duration.

a. 
​negative; smaller

b. 
​positive; larger

c. 
​negative; larger

d. 
​none of the above
 
 
41.
If a bank has assets and liabilities in dollars and euros, its exposure to interest rate risk can best be minimized if the

a. 
​currency mix of assets is similar to that of liabilities.

b. 
​overall rate sensitivity of assets and liabilities is similar.

c. 
​rate sensitivity of assets and liabilities is matched for each currency.

d. 
​A and B
 
 
42.
If a bank sells interest rate futures, it ____ of rising interest rates and ____ of declining interest rates on its interest expenses.

a. 
​reduces the potential adverse effect; reduces the potential favorable effect

b. 
​increases the potential adverse effect; increases the potential favorable effect

c. 
​decreases the potential adverse effect; increases the potential favorable effect

d. 
​increases the potential adverse effect; decreases the potential favorable effect
 
 
 
 
 
 
 
 
 

43.
If Bank A has a negative gap and Bank B has a positive gap, which of the following is true?

a. 
​Bank A is more favorably affected by rising interest rates.

b. 
​Bank B is more favorably affected by falling interest rates.

c. 
​Bank A is adversely affected by falling interest rates.

d. 
​none of the above
 
 
44.
​If interest rates ____, banks with ____ duration gaps will be ____ affected.

a. 
​rise; positive; positively

b. 
​rise; positive; adversely

c. 
​decrease; positive; adversely

d. 
​decrease; negative; positively

e. 
​none of the above
 
 
45.
If the duration of all banks assets with a maturity of greater than one year is similar to that of its liabilities with a maturity greater than one year, interest rate risk is nonexistent.

a. 
​True

b. 
​False
 
 
46.
​In an interest rate swap, a bank whose liabilities are ____ rate sensitive than its assets can swap payments with a ____ interest rate in exchange for payments with a ____ interest rate.

a. 
​more; fixed; variable

b. 
​more; variable; fixed

c. 
​less; fixed; variable

d. 
​less; fixed; fixed

e. 
​none of the above
 
 
47.
​In a regression analysis using a bank’s stock return, an interest rate proxy, and market returns, a ____ coefficient for the interest rate variable suggests that the bank’s performance is ____ affected by ____ interest rates.

a. 
​positive; adversely; rising

b. 
​positive; favorably; declining

c. 
​negative; adversely; rising

d. 
​negative; favorably; rising
 
 
 
 
 
 
 
 
 

48.
​International diversification of loans can best reduce a bank’s overall credit risk if

a. 
​the countries where loans are given are clustered together in a single continent.

b. 
​the countries where loans are given have economic cycles that do not move together over time.

c. 
​A and B

d. 
​none of the above
 
 
49.
​____ is (are) least likely to be used as a method of reducing interest rate risk.

a. 
​Maturity matching

b. 
​Floating-rate loans

c. 
​Stock options

d. 
​Interest rate swaps

e. 
​Interest rate caps
 
 
50.
​____ is not a method used to assess interest rate risk.

a. 
​Efficiency analysis

b. 
​Gap analysis

c. 
​Duration analysis

d. 
​Regression analysis
 
 
51.
​____ is not a method used to assess interest rate risk.

a. 
​Gap analysis

b. 
​Ratio analysis

c. 
​Duration analysis

d. 
​Regression analysis

e. 
​All of the above are methods to assess interest rate risk.
 
 
52.
​Leskar Bank has $2 million in rate-sensitive liabilities and $3 million in rate-sensitive assets. Leskar’s gap ratio is ____.

a. 
​1.5

b. 
​0.67

c. 
​$1 million

d. 
​none of the above
 
 
53.
. ​Macon Bank has interest revenues of $4 million, interest expenses of $5 million, and assets totaling $20 million. Macon Bank’s net interest margin is

a. 
​$1 million.

b. 
​-$1 million.

c. 
​5 percent.

d. 
​-5 percent.
 
 
 
 
 
 
 
 
 

54.
Most loan sales enable the bank originating the loan to continue servicing the loan.

a. 
​True

b. 
​False
 
 
55.
The ____ of interest rate futures ____ the potential adverse effect of rising interest rates on a bank’s interest expenses.
a. 
​sale; increases
b. 
​sale; reduces
c. 
​purchase; reduces
d. 
​both A and C are correct
 
 
56.
Other things being equal, assets with ____ maturities and ____ frequent coupon payments have longer durations.

a. 
​shorter; more

b. 
​shorter; less

c. 
​longer; more

d. 
​longer; less
 
 
57.
Other things being equal, assets with shorter maturities have ____ durations. Assets that generate more frequent coupon payments have ____ durations.

a. 
​shorter; longer

b. 
​shorter; shorter

c. 
​longer; shorter

d. 
​longer; longer
 
 
58.
The performance of a bank that continually concentrates on short-term deposits in euros and adjustable-rate dollar loans with equal rate sensitivity is

a. 
​unaffected if euro interest rates increase and U.S. rates decrease.

b. 
​unaffected if U.S. interest rates increase and euro interest rates decrease.

c. 
​adversely affected if euro interest rates increase and U.S. rates decrease.

d. 
​adversely affected if U.S. interest rates increase and euro rates decrease.

e. 
​A and B
 
 
59.
​Petri Bank had interest revenues of $70 million last year and $30 million in interest expenses. About $300 million of Petri’s $800 million in assets are rate sensitive, while $600 million of its liabilities are rate sensitive. Petri Bank’s net interest margin is ____ percent.
a. 
​4.0
b. 
​3.6
c. 
​6.7
d. 
​5.0
 
 
60.
Ringo Bank has a profit after taxes of $3 million, total assets of $300 million, and shareholder’s equity of $30 million. Ringo’s return on equity (ROE) is ____ percent.

a. 
​1.0

b. 
​10.0

c. 
​3.0

d. 
​none of the above
 
 
 
 
 
 
 
 
 

61.
The risk of a loss due to closing out a transaction is referred to as ____ risk.

a. 
​credit

b. 
​settlement

c. 
​interest rate

d. 
​exchange rate

e. 
​none of the above
 
 
62.
​ROE is defined as
 
 
63.
The Sarbanes-Oxley Act has had little impact on the monitoring conducted by the board members of commercial banks.

a. 
​True

b. 
​False
 
 
64.
The say on pay rules require all decisions about executive compensation to be made only by outside directors. 

a. 
​True

b. 
​False
 
 
65.
​The measure of interest rate risk that uses the difference between rate-sensitive assets and rate-sensitive liabilities is called

a. 
​gap measurement.

b. 
​duration measurement.

c. 
​duration ratio.

d. 
​gap ratio.
 
 
66.
When a bank makes an international loan containing a clause that allows repayment in a foreign currency, the bank is exposed to

a. 
​loan settlement risk.

b. 
​exchange rate risk.

c. 
​global exchange risk.

d. 
​currency transaction risk.
 
 
67.
When determining the appropriate interest rate to charge on a loan, a bank uses the Federal Reserve’s primary credit lending rate as a benchmark and adds a premium to this rate for less creditworthy customers.

a. 
​True

b. 
​False
 
 
 
 
 
 
 
 
 

68.
When measuring exposure to market risk, banks commonly use the ________.

a. 
​value-at-risk method

b. 
​operating leverage measure 

c. 
​matching maturity method

d. 
​forward rate method
 
 
69.
​Whether a bank has a temporary or a permanent need for funds, the decision should be to borrow in the federal funds market.

a. 
​True

b. 
​False
 
 
70.
Which of the following financial institutions would be most willing to swap variable-rate payments for fixed-rate payments in order to reduce exposure to interest rate risk?

a. 
​one whose assets and liabilities are equally interest-rate sensitive

b. 
​one whose assets are more interest-rate sensitive than its liabilities

c. 
​one whose liabilities are more interest-rate sensitive than its assets

d. 
​one whose gap ratio is equal to 1.0
 
 
71.
Which of the following is a measure for banks to use to assess their exposure to interest rate risk?

a. 
​capital ratio

b. 
​leverage measure

c. 
​duration measurement

d. 
​gap ratio

e. 
​C and D
 
 
72.
​Which of the following is a method that a bank can use to reduce its credit risk?

a. 
​diversifying its loans across industries

b. 
​focusing on credit card loans

c. 
​focusing on consumer loans

d. 
​selling its holdings of Treasury securities
 
 
73.
Which of the following is not a function of a bank’s board of directors?

a. 
​overseeing acquisitions

b. 
​determining a compensation system for the bank’s executives

c. 
​overseeing policies for changing the bank’s capital structure

d. 
​pursuing a proxy contest to change the bank’s dividend policy