Question 1

In a cap or floor, the only party that is required to perform is the:

Accepted Answer

A)  Buyer. 
B)  Seller. 
C)  Asset/liability manager. 
D)  Depository institution. 
E)  None of the above. 
A)  Buyer. 
B)  Seller. 
C)  Asset/liability manager. 
D)  Depository institution. 
E)  None of the above. B

Question 2

An agreement whereby two parties agree to exchange periodic payments is called:

Accepted Answer

A)  An option. 
B)  A futures contract. 
C)  A swap. 
D)  Cap and floor agreements. 
E)  None of the above. 
A)  An option. 
B)  A futures contract. 
C)  A swap. 
D)  Cap and floor agreements. 
E)  None of the above. C

Question 3

Swaps are beneficial because:

Accepted Answer

A)  They are more transactionally efficient instruments. 
B)  They increase the liquidity in the swap market. 
C)  They offer longer maturities than forward and futures contracts. 
D)  All of the above. 
E)  None of the above. 
A)  They are more transactionally efficient instruments. 
B)  They increase the liquidity in the swap market. 
C)  They offer longer maturities than forward and futures contracts. 
D)  All of the above. 
E)  None of the above. D

Question 4

When two parties agree to swap payments based on different currencies, this type of swap is called:

Accepted Answer

A)  Interest rate swap. 
B)  Equity swap. 
C)  Currency swap. 
D)  Interest rate-equity swap. 
E)  None of the above. 
A)  Interest rate swap. 
B)  Equity swap. 
C)  Currency swap. 
D)  Interest rate-equity swap. 
E)  None of the above.

Question 5

The buyer of a cap benefits if the designated reference:

Accepted Answer

A)  Rises above the strike rate. 
B)  Falls below the strike rate. 
C)  Stays the same. 
D)  None of the above. 
A)  Rises above the strike rate. 
B)  Falls below the strike rate. 
C)  Stays the same. 
D)  None of the above.

Question 6

Explain the relationship between a cap and a floor and an option.

Accepted Answer

a. Package of option

Question 7

Swaps are currently traded in the over-the-counter market and not on any organized exchange.

Accepted Answer

A) True 
 B)False

Question 8

In a swap, two parties are exchanging payments. The risk that one party will fail to meet its obligation to make payments is called:

Accepted Answer

A)  Default risk. 
B)  Counterparty risk. 
C)  Credit risk. 
D)  Price risk. 
E)  None of the above. 
A)  Default risk. 
B)  Counterparty risk. 
C)  Credit risk. 
D)  Price risk. 
E)  None of the above.

Question 9

Participants in financial markets use interest rate swaps to:

Accepted Answer

A)  Compensate the asset/liability manager for risk-taking. 
B)  Alter the cash flow characteristics of their assets or liabilities. 
C)  Capitalize on perceived capital market imperfections. 
D)  b and c only. 
E)  All of the above. 
A)  Compensate the asset/liability manager for risk-taking. 
B)  Alter the cash flow characteristics of their assets or liabilities. 
C)  Capitalize on perceived capital market imperfections. 
D)  b and c only. 
E)  All of the above.

Question 10

A cap is equivalent to:

Accepted Answer

A)  A package of forwards. 
B)  A package of call options. 
C)  A package of put options. 
D)  Complex options. 
E)  None of the above. 
A)  A package of forwards. 
B)  A package of call options. 
C)  A package of put options. 
D)  Complex options. 
E)  None of the above.

Question 11

How can swaps be used to create securities?

Accepted Answer

a. Structu

Question 12

In an interest rate swap, the counterparties swap payments in the same currency based on:

Accepted Answer

A)  Information on market interest rate movements. 
B)  An interest rate. 
C)  An index. 
D)  Information on price movements in the market. 
E)  None of the above. 
A)  Information on market interest rate movements. 
B)  An interest rate. 
C)  An index. 
D)  Information on price movements in the market. 
E)  None of the above.

Question 13

The buyer of a floor benefits if the designated reference:

Accepted Answer

A)  Stays the same. 
B)  Rises above the strike rate. 
C)  Falls below the strike rate. 
D)  None of the above. 
A)  Stays the same. 
B)  Rises above the strike rate. 
C)  Falls below the strike rate. 
D)  None of the above.

Question 14

In an interest rate cap or floor agreement, the predetermined level of the reference rate that is used to determine when and how much the seller must compensate the buyer is known as:

Accepted Answer

A)  The strike rate. 
B)  Caption. 
C)  Flotion. 
D)  The swap rate. 
E)  None of the above. 
A)  The strike rate. 
B)  Caption. 
C)  Flotion. 
D)  The swap rate. 
E)  None of the above.

Question 15

When one party is exchanging a payment based on an interest rate and the other party based on the return of some equity index, the swap agreement is called:

Accepted Answer

A)  In interest rate swap. 
B)  An equity swap. 
C)  An interest rate-equity swap. 
D)  An index swap. 
E)  A currency swap. 
A)  In interest rate swap. 
B)  An equity swap. 
C)  An interest rate-equity swap. 
D)  An index swap. 
E)  A currency swap.

Question 16

Swaps, caps, and floors have played a key role in the development of a global financial market.

Accepted Answer

A) True 
 B)False

Question 17

Explain the relationship between a swap and a forward contract.

Accepted Answer

a. Payoff structure.

Question 18

A floor is equivalent to:

Accepted Answer

A)  A package of call options. 
B)  A package of put options. 
C)  A package of forwards. 
D)  A package of futures. 
E)  None of the above. 
A)  A package of call options. 
B)  A package of put options. 
C)  A package of forwards. 
D)  A package of futures. 
E)  None of the above.

Question 19

Swaps can be used for asset/liability management and the creation of securities.

Accepted Answer

A) True 
 B)False

Question 20

When the seller agrees to pay the buyer if the designated reference exceeds a predetermined level, the agreement is referred to as:

Accepted Answer

A)  A cap. 
B)  A floor. 
C)  The strike. 
D)  A swap. 
E)  None of the above. 
A)  A cap. 
B)  A floor. 
C)  The strike. 
D)  A swap. 
E)  None of the above.

Exam 12: Introduction to the Swaps, Caps, and Floors Markets

In a cap or floor, the only party that is required to perform is the:

An agreement whereby two parties agree to exchange periodic payments is called:

Swaps are beneficial because:

When two parties agree to swap payments based on different currencies, this type of swap is called:

The buyer of a cap benefits if the designated reference:

Explain the relationship between a cap and a floor and an option.

Swaps are currently traded in the over-the-counter market and not on any organized exchange.

In a swap, two parties are exchanging payments. The risk that one party will fail to meet its obligation to make payments is called:

Participants in financial markets use interest rate swaps to:

A cap is equivalent to:

How can swaps be used to create securities?

In an interest rate swap, the counterparties swap payments in the same currency based on:

The buyer of a floor benefits if the designated reference:

In an interest rate cap or floor agreement, the predetermined level of the reference rate that is used to determine when and how much the seller must compensate the buyer is known as:

When one party is exchanging a payment based on an interest rate and the other party based on the return of some equity index, the swap agreement is called:

Swaps, caps, and floors have played a key role in the development of a global financial market.

Explain the relationship between a swap and a forward contract.

A floor is equivalent to:

Swaps can be used for asset/liability management and the creation of securities.

When the seller agrees to pay the buyer if the designated reference exceeds a predetermined level, the agreement is referred to as:

Introduction

Overview of Market Participants and Financial Innovation

Depository Institutions

Insurance Companies

Asset Management Firms

Investment Banking Firms

Primary and Secondary Markets

Risk and Return Theories: I

Risk and Return Theories: II

Introduction to Financial Futures Markets

Introduction to Options Markets

Common Stock Market: I

Common Stock Market: II

Stock Options Market

The Market for Stock Index Products and Other Equity Derivatives

The Theory and Structure of Interest Rates

Valuation of Debt Contracts and Their Price Volatility Characteristics

The Term Structure of Interest Rates

Money Markets

Treasury and Agency Securities Markets

Corporate Senior Instruments Markets: I

Corporate Senior Instruments Markets: II

Municipal Securities Markets

The Residential Mortgage Market

The Market for Residential Mortgage-Backed Securities

Market for Asset-Backed Securities

Market for Commercial Mortgage Loans and Commercial Mortgage-Backed Securities

International Bond Markets

International Bond Markets

Market for Interest Rate Risk Transfer Vehicles: OTC Instruments

The Market for Foreign Exchange and Risk Control Instruments

Filters