Question 1

The writer of a bond put option

Accepted Answer

A) receives a premium in return for standing ready to sell the bond at the exercise price. 
B) receives a premium in return for standing ready to buy bonds at the exercise price. 
C) pays a premium and has the right to sell the underlying bond at the agreed exercise price. 
D) pays a premium and has the right to buy the underlying bond at the agreed exercise price 
E) pays a premium and has the obligation to buy the underlying bond at the agreed exercise price 
A) receives a premium in return for standing ready to sell the bond at the exercise price. 
B) receives a premium in return for standing ready to buy bonds at the exercise price. 
C) pays a premium and has the right to sell the underlying bond at the agreed exercise price. 
D) pays a premium and has the right to buy the underlying bond at the agreed exercise price 
E) pays a premium and has the obligation to buy the underlying bond at the agreed exercise price

Question 2

Regulators tend to discourage, and even prohibit in some cases, FIs from writing options because the upside potential is unlimited and the downside losses are potentially limited.

Accepted Answer

A) True 
 B)False

Question 3

Buying a cap is like buying insurance against a decrease in interest rates.

Accepted Answer

A) True 
 B)False

Question 4

A naked option is an option written that has no identifiable underlying asset or liability position.

Accepted Answer

A) True 
 B)False

Question 5

A bank purchases a 3-year, 6 percent $5 million cap (call options on interest rates), where payments are paid or received at the end of year 2 and 3 as shown below: $$\begin{array} { | l | c | c | c | c | } 
\hline \text { End of Year: } & 0 & 1 & 2 & 3 \
\hline \text { Cash Flow at end of year: } & - & - & \mathrm { x } & \mathrm { x } \
\hline
\end{array}$$ Instead of a cap, if the bank had purchased a 3-year 6 percent floor and interest rates are 5 percent and 6 percent in years 2 and 3, respectively, what are the payoffs to the bank?

Accepted Answer

A) The bank will receive $50,000 at the end of year 2 and receive $50,000 at the end of year 3. 
B) The bank will receive $50,000 at the end of year 2 and pay $50,000 at the end of year 3. 
C) The bank will receive $0 at the end of year 2 and pay $50,000 at the end of year 3. 
D) The bank will receive $0 at the end of year 2 and receive $50,000 at the end of year 3. 
E) The bank will receive $50,000 at the end of year 2 and pay $0 at the end of year 3. 
A) The bank will receive $50,000 at the end of year 2 and receive $50,000 at the end of year 3. 
B) The bank will receive $50,000 at the end of year 2 and pay $50,000 at the end of year 3. 
C) The bank will receive $0 at the end of year 2 and pay $50,000 at the end of year 3. 
D) The bank will receive $0 at the end of year 2 and receive $50,000 at the end of year 3. 
E) The bank will receive $50,000 at the end of year 2 and pay $0 at the end of year 3.

The writer of a bond put option

Regulators tend to discourage, and even prohibit in some cases, FIs from writing options because the upside potential is unlimited and the downside losses are potentially limited.

Buying a cap is like buying insurance against a decrease in interest rates.

A naked option is an option written that has no identifiable underlying asset or liability position.

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

Swaps

Loan Sales

Securitization

Filters

Exam 24: Options, Caps, Floors, and Collars

The writer of a bond put option

Regulators tend to discourage, and even prohibit in some cases, FIs from writing options because the upside potential is unlimited and the downside losses are potentially limited.

Buying a cap is like buying insurance against a decrease in interest rates.

A naked option is an option written that has no identifiable underlying asset or liability position.

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

Swaps

Loan Sales

Securitization

Filters