Question 1

In the derivatives markets, the instrument with the longest potential maturity is

Accepted Answer

A) options. 
B) futures. 
C) forwards. 
D) swaps. 
E) currencies. 
A) options. 
B) futures. 
C) forwards. 
D) swaps. 
E) currencies.

Question 2

Transitioning from LIBOR to SOFR will be relatively seamless since SOFR is calculated similarly to LIBOR.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following is NOT true?

Accepted Answer

A) FI bearing the credit risk of a loan is often different from the FI that issued the loan. 
B) The buyer of a credit swap makes periodic payments to the seller until the end of the life of the swap. 
C) Banks have been more willing than the insurance companies to bear credit risk. 
D) The settlement of the swap in the event of a default involves either physical delivery of the bonds or a cash payment. 
E) Credit swap specifies the number of different bonds that can be delivered in the event of a default. 
A) FI bearing the credit risk of a loan is often different from the FI that issued the loan. 
B) The buyer of a credit swap makes periodic payments to the seller until the end of the life of the swap. 
C) Banks have been more willing than the insurance companies to bear credit risk. 
D) The settlement of the swap in the event of a default involves either physical delivery of the bonds or a cash payment. 
E) Credit swap specifies the number of different bonds that can be delivered in the event of a default.

Question 4

In a conventional interest rate swap agreement, the fixed-rate payer is attempting to transform the variable-rate nature of its liabilities into fixed-rate liabilities.

Accepted Answer

A) True 
 B)False

Question 5

Policies established by The International Swaps and Derivatives Association (ISDA) forbid swap contracts to be made between parties of different credit standing.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following is NOT a reason that a swap may have less credit risk than an individual loan?

Accepted Answer

A) Netting of payments. 
B) Payment flows are interest and not principal. 
C) Standby letters of credit are available. 
D) Swaps can be cancelled, individual loans cannot. 
E) None of the options. 
A) Netting of payments. 
B) Payment flows are interest and not principal. 
C) Standby letters of credit are available. 
D) Swaps can be cancelled, individual loans cannot. 
E) None of the options.

Question 7

The fastest growing type of swap is

Accepted Answer

A) a commodity swap. 
B) a credit swap. 
C) a currency swap. 
D) an equity swap. 
E) an interest rate swap. 
A) a commodity swap. 
B) a credit swap. 
C) a currency swap. 
D) an equity swap. 
E) an interest rate swap.

Question 8

The credit risk on swaps is considered to be

Accepted Answer

A) more than the credit risk on loans. 
B) less than the credit risk on loans. 
C) same as the credit risk on loans. 
D) is negligible compared to the credit risk on loans. 
E) less likely to cause an FI to fail than is interest rate risk. 
A) more than the credit risk on loans. 
B) less than the credit risk on loans. 
C) same as the credit risk on loans. 
D) is negligible compared to the credit risk on loans. 
E) less likely to cause an FI to fail than is interest rate risk.

Question 9

What is replacement risk in the swap market?

Accepted Answer

A) The risk of substituting a defaulted swap with a new swap at less favorable terms. 
B) The cost incurred by the swap dealer in replacing the defaulting party on the same terms as the original swap. 
C) The risk involved in exchanging fixed interest payments for floating interest payments by two counterparties. 
D) The risk associated with long-term hedge sometimes for as long as 15 years. 
E) The comparative disadvantage faced by swap seller in making variable or floating rate payments. 
A) The risk of substituting a defaulted swap with a new swap at less favorable terms. 
B) The cost incurred by the swap dealer in replacing the defaulting party on the same terms as the original swap. 
C) The risk involved in exchanging fixed interest payments for floating interest payments by two counterparties. 
D) The risk associated with long-term hedge sometimes for as long as 15 years. 
E) The comparative disadvantage faced by swap seller in making variable or floating rate payments.

Question 10

A US bank has fixed-rate assets in US dollars and variable-rate liabilities in Euros.This bank is exposed to

Accepted Answer

A) interest rate increases and an appreciation of the dollar. 
B) interest rate declines and an appreciation of the dollar. 
C) interest rate increases and a depreciation of the dollar. 
D) interest rate declines and a depreciation of the dollar. 
E) zero exposure to interest rate and exchange rate exposures. 
A) interest rate increases and an appreciation of the dollar. 
B) interest rate declines and an appreciation of the dollar. 
C) interest rate increases and a depreciation of the dollar. 
D) interest rate declines and a depreciation of the dollar. 
E) zero exposure to interest rate and exchange rate exposures.

Question 11

Which of the following is the primary sellers of credit risk protection?

Accepted Answer

A) Insurance companies. 
B) Mutual funds. 
C) Depository institutions. 
D) Vulture funds. 
E) Commercial banks. 
A) Insurance companies. 
B) Mutual funds. 
C) Depository institutions. 
D) Vulture funds. 
E) Commercial banks.

Question 12

In a pure credit swap the FI lender makes a payment each period in exchange for the payment of interest in any period that the borrower defaults on the loan.

Accepted Answer

A) True 
 B)False

Question 13

An interest rate swap is essentially a series of forward contracts on interest rates.

Accepted Answer

A) True 
 B)False

Question 14

Pricing a fixed-floating rate swap agreement to meet no-arbitrage conditions requires that the expected present value of the cash flow payments made by the fixed-rate seller should equal the expected value of the cash flow payments made by the variable-rate buyer.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following is true of the "netting" process in the swap market?

Accepted Answer

A) It decreases or mitigates the credit risk on swaps. 
B) Both parties make payments to each other as a consequence. 
C) It implies that the default exposure of the in-the-money party is the total fixed or floating payment. 
D) It does not happen across contracts. 
E) Netting by novation increases the potential risk of loss. 
A) It decreases or mitigates the credit risk on swaps. 
B) Both parties make payments to each other as a consequence. 
C) It implies that the default exposure of the in-the-money party is the total fixed or floating payment. 
D) It does not happen across contracts. 
E) Netting by novation increases the potential risk of loss.

Question 16

Credit risk is more likely to lead to failure of an FI than either interest rate or foreign-exchange risk.

Accepted Answer

A) True 
 B)False

Question 17

A bank with total assets of $271 million and equity of $31 million has a leverage adjusted duration gap of +0.21 years.One-year maturity notes are currently priced at par and are paying 4.5 percent annually.Two-year maturity notes are currently priced at par and are paying 5 percent annually.The terms of a swap of $100 million notional value of liabilities' payments are 4.95 percent annual fixed payments in exchange for floating rate payments tied to the annual discount yield. What is the forward one-year discount yield expected next year?

Accepted Answer

A) 5.013 percent. 
B) 5.530 percent. 
C) 4.500 percent. 
D) 5.000 percent. 
E) 4.950 percent. 
A) 5.013 percent. 
B) 5.530 percent. 
C) 4.500 percent. 
D) 5.000 percent. 
E) 4.950 percent.

Question 18

At the end of 2015, the world-wide notational value of swap agreements was less than $400 trillion.

Accepted Answer

A) True 
 B)False

Question 19

A thrift has funded 10 percent fixed-rate assets with variable-rate liabilities at LIBOR + 2 (L + 2) percent.A bank has funded variable-rate assets with fixed-rate liabilities at 6 percent.The bank's variable-rate assets earn LIBOR + 1 (L + 1) percent.The thrift and the bank have reached agreement on an interest-rate swap with the fixed-rate swap payment at 6 percent and the variable-rate swap payment at LIBOR. What will be the net after-swap yield on assets for the thrift?

Accepted Answer

A) Variable-rate at LIBOR. 
B) Fixed-rate at 8 percent. 
C) Fixed-rate at 1 percent. 
D) Fixed-rate at 2 percent. 
E) None of the options. 
A) Variable-rate at LIBOR. 
B) Fixed-rate at 8 percent. 
C) Fixed-rate at 1 percent. 
D) Fixed-rate at 2 percent. 
E) None of the options.

Question 20

A bank with total assets of $271 million and equity of $31 million has a leverage adjusted duration gap of +0.21 years.One-year maturity notes are currently priced at par and are paying 4.5 percent annually.Two-year maturity notes are currently priced at par and are paying 5 percent annually.The terms of a swap of $100 million notional value of liabilities' payments are 4.95 percent annual fixed payments in exchange for floating rate payments tied to the annual discount yield. What are the expected end-of-year profits or losses if the bank hedges its interest rate risk exposure using the swap?

Accepted Answer

A) The bank expects to lose $0.45 million in the first year and earn $0.58 million in the second year by buying the swap to hedge against interest rate increases. 
B) The bank expects to lose $0.45 million in the first year and earn $0.58 million in the second year by selling the swap to hedge against interest rate decreases. 
C) The bank expects to earn $0.45 million in the first year, lose $0.58 million in the second year by buying the swap to hedge against interest rate increases. 
D) The bank expects to earn $0.45 million in the first year and lose $0.58 million in the second year by selling the swap to hedge against interest rate decreases. 
E) The bank will not do the swap because it has no interest rate risk exposure. 
A) The bank expects to lose $0.45 million in the first year and earn $0.58 million in the second year by buying the swap to hedge against interest rate increases. 
B) The bank expects to lose $0.45 million in the first year and earn $0.58 million in the second year by selling the swap to hedge against interest rate decreases. 
C) The bank expects to earn $0.45 million in the first year, lose $0.58 million in the second year by buying the swap to hedge against interest rate increases. 
D) The bank expects to earn $0.45 million in the first year and lose $0.58 million in the second year by selling the swap to hedge against interest rate decreases. 
E) The bank will not do the swap because it has no interest rate risk exposure.

Exam 25: Swaps

In the derivatives markets, the instrument with the longest potential maturity is

Transitioning from LIBOR to SOFR will be relatively seamless since SOFR is calculated similarly to LIBOR.

Which of the following is NOT true?

In a conventional interest rate swap agreement, the fixed-rate payer is attempting to transform the variable-rate nature of its liabilities into fixed-rate liabilities.

Policies established by The International Swaps and Derivatives Association (ISDA) forbid swap contracts to be made between parties of different credit standing.

Which of the following is NOT a reason that a swap may have less credit risk than an individual loan?

The fastest growing type of swap is

The credit risk on swaps is considered to be

What is replacement risk in the swap market?

A US bank has fixed-rate assets in US dollars and variable-rate liabilities in Euros.This bank is exposed to

Which of the following is the primary sellers of credit risk protection?

In a pure credit swap the FI lender makes a payment each period in exchange for the payment of interest in any period that the borrower defaults on the loan.

An interest rate swap is essentially a series of forward contracts on interest rates.

Pricing a fixed-floating rate swap agreement to meet no-arbitrage conditions requires that the expected present value of the cash flow payments made by the fixed-rate seller should equal the expected value of the cash flow payments made by the variable-rate buyer.

Which of the following is true of the "netting" process in the swap market?

Credit risk is more likely to lead to failure of an FI than either interest rate or foreign-exchange risk.

At the end of 2015, the world-wide notational value of swap agreements was less than $400 trillion.

Why Are Financial Institutions Special

Financial Services: Depository Institutions

Financial Services: Finance Companies

Financial Services: Securities Brokerage and Investment Banking

Financial Services: Mutual Funds and Hedge Funds

Financial Services: Insurance

Risks of Financial Institutions

Interest Rate Risk I

Interest Rate Risk II

Credit Risk: Individual Loan Risk

Credit Risk: Loan Portfolio and Concentration Risk

Liquidity Risk

Foreign Exchange Risk

Sovereign Risk

Market Risk

Off-Balance-Sheet Risk

Technology and Other Operational Risks

Fintech Risks

Liability and Liquidity Management

Deposit Insurance and Other Liability Guarantees

Capital Adequacy

Product and Geographic Expansion

Futures and Forwards

Options, Caps, Floors, and Collars

Loan Sales

Securitization

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