Question 1

Suppose that a bank has a negative duration gap and interest rates are expected to fall. In this case the bank:

Accepted Answer

A)  should hedge interest rate risk by going short in the futures market 
B)  should hedge interest rate risk by going long in the futures market 
C)  has no interest rate risk in the sense that the net interest margin will increase as rates fall. 
A)  should hedge interest rate risk by going short in the futures market 
B)  should hedge interest rate risk by going long in the futures market 
C)  has no interest rate risk in the sense that the net interest margin will increase as rates fall.

Question 2

Differences in credit quality spreads between floating and fixed rate markets create the opportunity for both parties in an interest rate swap to lower their cost of funds.

Accepted Answer

A) True 
 B)False

Question 3

What lowers the credit risk of the financial futures contracts?

Accepted Answer

A)  a clearinghouse 
B)  insurance 
C)  guarantees 
D)  low risk securities 
E)  none of the above 
A)  a clearinghouse 
B)  insurance 
C)  guarantees 
D)  low risk securities 
E)  none of the above

Question 4

The seller of a futures contract is said to have a short position

Accepted Answer

A) True 
 B)False

Question 5

Which of the following is NOT true of a futures contract?

Accepted Answer

A)  standardized agreement 
B)  set price to be bought or sold in the future 
C)  option to exercise the contract 
D)  specified quantity of a financial asset to be bought or sold in the future 
A)  standardized agreement 
B)  set price to be bought or sold in the future 
C)  option to exercise the contract 
D)  specified quantity of a financial asset to be bought or sold in the future

Question 6

A short of sell hedge would usually be used if the bank would be harmed in the cash market by rising interest rates.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following is(are) an advantage(s) of swaps?

Accepted Answer

A)  low search costs 
B)  customized to meet the exact needs of the parties involved 
C)  can be established for a long time 
D)  b and c 
E)  a, b, and c 
A)  low search costs 
B)  customized to meet the exact needs of the parties involved 
C)  can be established for a long time 
D)  b and c 
E)  a, b, and c

Question 8

A bank with a positive duration gap could sell put options in order to hedge its interest rate risk.

Accepted Answer

A) True 
 B)False

Question 9

In an interest rate swap, both the principal and interest are exchanged.

Accepted Answer

A) True 
 B)False

Question 10

Suppose the bank has a positive dollar gap and interest rates are expected to fall in the
Near future. The bank could hedge this interest rate risk by:

Accepted Answer

A)  buying a call option 
B)  selling a call option 
C)  buying a put option 
D)  none of the above; the bank has no interest rate risk because its net interest margin will increase as rates fall 
A)  buying a call option 
B)  selling a call option 
C)  buying a put option 
D)  none of the above; the bank has no interest rate risk because its net interest margin will increase as rates fall

Question 11

The buyer of a futures contract is said to have a long position

Accepted Answer

A) True 
 B)False

Question 12

Suppose the bank has a positive duration gap and interest rates are expected to rise in the
Near future. The bank could hedge this interest rate risk by:

Accepted Answer

A)  buying a call option 
B)  selling a call option 
C)  selling a put option 
D)  none of the above; the bank has no interest rate risk because its interest rate margin will increase as rates rise 
A)  buying a call option 
B)  selling a call option 
C)  selling a put option 
D)  none of the above; the bank has no interest rate risk because its interest rate margin will increase as rates rise

Question 13

As with futures markets, options contracts are standardized contracts that trade on organized exchanges.

Accepted Answer

A) True 
 B)False

Question 14

The number of contracts that need to be used to hedge a cash position is determined by the value of the cash flow to be hedged, the face value of the futures contract, the maturity of the anticipated cash flow, the maturity of the futures contract, and the ratio of the variability of the cash market to the variability of the futures market.

Accepted Answer

A) True 
 B)False

Question 15

The principal purpose of an interest rate swap is to reduce the cost of borrowing.

Accepted Answer

A) True 
 B)False

Suppose that a bank has a negative duration gap and interest rates are expected to fall. In this case the bank:

Differences in credit quality spreads between floating and fixed rate markets create the opportunity for both parties in an interest rate swap to lower their cost of funds.

What lowers the credit risk of the financial futures contracts?

The seller of a futures contract is said to have a short position

Which of the following is NOT true of a futures contract?

A short of sell hedge would usually be used if the bank would be harmed in the cash market by rising interest rates.

Which of the following is(are) an advantage(s) of swaps?

A bank with a positive duration gap could sell put options in order to hedge its interest rate risk.

In an interest rate swap, both the principal and interest are exchanged.

Suppose the bank has a positive dollar gap and interest rates are expected to fall in the Near future. The bank could hedge this interest rate risk by:

The buyer of a futures contract is said to have a long position

Suppose the bank has a positive duration gap and interest rates are expected to rise in the Near future. The bank could hedge this interest rate risk by:

As with futures markets, options contracts are standardized contracts that trade on organized exchanges.

The principal purpose of an interest rate swap is to reduce the cost of borrowing.

Functions and Forms of Banking

The Bank Regulatory Environment

Evaluating Bank Performance

Bank Valuation

An Overview of Assetliability Management Alm

Investment Management

Credit Evaluation Process

Commercial and Industrial Lending

Real Estate and Consumer Lending

Liquidity Management

Capital Management

Managing Liabilities

Off-Balance Sheet Activities

Securities, Investment Insurance Products

Other Financial Services

Electronic Banking

Global Financial Services

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Exam 6: Techniques of Assetliability Management: Futures, Options, and Swaps

Suppose that a bank has a negative duration gap and interest rates are expected to fall. In this case the bank:

Differences in credit quality spreads between floating and fixed rate markets create the opportunity for both parties in an interest rate swap to lower their cost of funds.

What lowers the credit risk of the financial futures contracts?

The seller of a futures contract is said to have a short position

Which of the following is NOT true of a futures contract?

A short of sell hedge would usually be used if the bank would be harmed in the cash market by rising interest rates.

Which of the following is(are) an advantage(s) of swaps?

A bank with a positive duration gap could sell put options in order to hedge its interest rate risk.

In an interest rate swap, both the principal and interest are exchanged.

Suppose the bank has a positive dollar gap and interest rates are expected to fall in the Near future. The bank could hedge this interest rate risk by:

The buyer of a futures contract is said to have a long position

Suppose the bank has a positive duration gap and interest rates are expected to rise in the Near future. The bank could hedge this interest rate risk by:

As with futures markets, options contracts are standardized contracts that trade on organized exchanges.

The principal purpose of an interest rate swap is to reduce the cost of borrowing.

Functions and Forms of Banking

The Bank Regulatory Environment

Evaluating Bank Performance

Bank Valuation

An Overview of Assetliability Management Alm

Investment Management

Credit Evaluation Process

Commercial and Industrial Lending

Real Estate and Consumer Lending

Liquidity Management

Capital Management

Managing Liabilities

Off-Balance Sheet Activities

Securities, Investment Insurance Products

Other Financial Services

Electronic Banking

Global Financial Services

Filters