Question 1

Which of the following statements is true?

Accepted Answer

A)  In general, the relationship between the value of an option and the underlying value of a security is non-linear. 
B)  For an out-of-the money call option the price of the underlying security is less than the option's exercise price. 
C)  Using the delta method to derive the market value of an option is at best an approximation and to deal with the non-linearity of option pay-offs, some analysts consider an option's gamma too. 
D)  All of the listed options are correct. 
A)  In general, the relationship between the value of an option and the underlying value of a security is non-linear. 
B)  For an out-of-the money call option the price of the underlying security is less than the option's exercise price. 
C)  Using the delta method to derive the market value of an option is at best an approximation and to deal with the non-linearity of option pay-offs, some analysts consider an option's gamma too. 
D)  All of the listed options are correct. D

Question 2

Assume that the market value of assets is $120 and the market value of liabilities is $90. What is the bank's net worth?

Accepted Answer

A)  $210 
B)  $30 
C)  -$30 
D)  None of the listed options are correct. 
A)  $210 
B)  $30 
C)  -$30 
D)  None of the listed options are correct. B

Question 3

Including on-balance-sheet and off-balance-sheet activities, a bank's net worth is calculated as:

Accepted Answer

A)  (A-L) + (CA-CL) 
B)  (A-L) - (CA-CL) 
C)  (L-
A)  + (CA-CL) 
D)  (L-
A)  - (CA-CL) 
A)  (A-L) + (CA-CL) 
B)  (A-L) - (CA-CL) 
C)  (L-
A)  + (CA-CL) 
D)  (L-
A)  - (CA-CL) A

Question 4

Back-end fees are charged as a certain percentage of:

Accepted Answer

A)  commitment size and loan taken down. 
B)  utilised portion of commitment size. 
C)  unused portion of commitment size. 
D)  interest payable on the loan commitment. 
A)  commitment size and loan taken down. 
B)  utilised portion of commitment size. 
C)  unused portion of commitment size. 
D)  interest payable on the loan commitment.

Question 5

The current market value of an off-balance-sheet item is determined by finding the current market value of the underlying item.

Accepted Answer

A) True 
 B)False

Question 6

Interest rate risk is part of the loan commitment contingent risk because of the uncertainty of changes in interest rates before the borrower exercises his option to borrow.

Accepted Answer

A) True 
 B)False

Question 7

FIs may issue standby letters of credit to cover contingencies that are potentially more severe, less predictable and not necessarily trade related.

Accepted Answer

A) True 
 B)False

Question 8

The 'face value of an OBS item' is also referred to as the notional value.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following contingent risks are most likely to be created if a bank provides a loan commitment?

Accepted Answer

A)  interest rate risk and credit risk 
B)  draw-down risk 
C)  aggregate funding risk 
D)  All of the listed options are correct. 
A)  interest rate risk and credit risk 
B)  draw-down risk 
C)  aggregate funding risk 
D)  All of the listed options are correct.

Question 10

How do you interpret a delta of 0.30?

Accepted Answer

A)  A delta of 0.30 means that a one-cent change in the price of the underlying asset of the option leads to a 0.30 cent change in the price of the option. 
B)  A delta of 0.30 means that a ten-cent change in the price of the underlying asset of the option leads to a 0.30 cent change in the price of the option. 
C)  A delta of 0.30 means that a one-dollar change in the price of the underlying asset of the option leads to a 0.30 cent change in the price of the option. 
D)  A delta of 0.30 means that a one-dollar change in the price of the underlying asset of the option leads to a 30 per cent change in the price of the option. 
A)  A delta of 0.30 means that a one-cent change in the price of the underlying asset of the option leads to a 0.30 cent change in the price of the option. 
B)  A delta of 0.30 means that a ten-cent change in the price of the underlying asset of the option leads to a 0.30 cent change in the price of the option. 
C)  A delta of 0.30 means that a one-dollar change in the price of the underlying asset of the option leads to a 0.30 cent change in the price of the option. 
D)  A delta of 0.30 means that a one-dollar change in the price of the underlying asset of the option leads to a 30 per cent change in the price of the option.

Question 11

Assume a bank grants a loan commitment at an interest rate of 10 per cent p.a. and the risk premium on the loan is 2 per cent. The bank charges borrowers an upfront fee on the whole commitment of 0.25 per cent and a back-end fee on any unused proportion of the loan of 0.5 per cent. The compensating balance is 10 per cent and so are reserve requirements. Assume that the average draw-down of the loan is 80 per cent over the time of the loan commitment. What is the promised return on the loan commitment (round to two decimals)?

Accepted Answer

A)  12.00 per cent 
B)  12.75 per cent 
C)  13.23 per cent 
D)  13.67 per cent 
A)  12.00 per cent 
B)  12.75 per cent 
C)  13.23 per cent 
D)  13.67 per cent

Question 12

Assume a bank has bought a call option on bonds with a notional value of $200. Further assume that and that the delta of the option is calculated at 0.45. What is the contingent asset value (round to two decimals)?

Accepted Answer

A)  $200 / 0.45 = $444.44 
B)  $200 $\times$ 0.45 = $90.00 
C)  ($200 / 0.45) / 100 = $4.44 
D)  ($200 $\times$ 0.45) / 100 = $0.90 
A)  $200 / 0.45 = $444.44 
B)  $200 $\times$ 0.45 = $90.00 
C)  ($200 / 0.45) / 100 = $4.44 
D)  ($200 $\times$ 0.45) / 100 = $0.90

Question 13

Which of the following statements is true?

Accepted Answer

A)  The default risk in futures contracts is considered to be less than that of forward contracts because of daily marking to market of futures. 
B)  The default risk in futures contracts is considered to be less than that of forward contracts because of margin requirements on futures that act as a security bond and because of default guarantees by the future exchange itself. 
C)  The default risk in futures contracts is considered to be less than that of forward contracts because of price limits that spread out over times of extreme price fluctuations. 
D)  All of the listed options are correct. 
A)  The default risk in futures contracts is considered to be less than that of forward contracts because of daily marking to market of futures. 
B)  The default risk in futures contracts is considered to be less than that of forward contracts because of margin requirements on futures that act as a security bond and because of default guarantees by the future exchange itself. 
C)  The default risk in futures contracts is considered to be less than that of forward contracts because of price limits that spread out over times of extreme price fluctuations. 
D)  All of the listed options are correct.

Question 14

Takedown or draw-down risk in a loan commitment exposes the FI to:

Accepted Answer

A)  immediate liquidity risk. 
B)  basis and spread risk. 
C)  externality effects. 
D)  future liquidity risk. 
A)  immediate liquidity risk. 
B)  basis and spread risk. 
C)  externality effects. 
D)  future liquidity risk.

Question 15

An exporter demands a letter of credit in order to:

Accepted Answer

A)  guarantee safe delivery of goods to the importer. 
B)  guarantee receipt of payment from the importer upon receipt of the goods. 
C)  protect against adverse changes in foreign exchange rates. 
D)  ascertain the creditworthiness of the importer. 
A)  guarantee safe delivery of goods to the importer. 
B)  guarantee receipt of payment from the importer upon receipt of the goods. 
C)  protect against adverse changes in foreign exchange rates. 
D)  ascertain the creditworthiness of the importer.

Question 16

An Adverse material changes in conditions clause is included in loan commitments to protect the FI against:

Accepted Answer

A)  funding risk. 
B)  interest rate risk. 
C)  takedown risk. 
D)  credit risk. 
A)  funding risk. 
B)  interest rate risk. 
C)  takedown risk. 
D)  credit risk.

Question 17

Assume a bank makes a loan commitment to the value of $10m at a fixed interest rate of 10 per cent p.a. for a period of one year. Assume the borrower only uses 50 per cent of the provided funds over the course of the year. If the bank charges a back-end fee of 0.5 per cent, what is the additional revenue the bank would generate?

Accepted Answer

A)  None, unless the loan is prepaid early. 
B)  $2500 
C)  $25 000 
D)  $5000 
A)  None, unless the loan is prepaid early. 
B)  $2500 
C)  $25 000 
D)  $5000

Question 18

Which of the following statements is true?

Accepted Answer

A)  A futures contract is a standardised contract between two parties to deliver and pay for an asset in the future. 
B)  A futures contract is a non-standardised contract between two parties to deliver and pay for an asset in the future. 
C)  A futures contract is a standardised contract guaranteed by organised exchanges to deliver and pay for an asset in the future. 
D)  A futures contract is a non-standardised contract b guaranteed by organised exchanges to deliver and pay for an asset in the future. 
A)  A futures contract is a standardised contract between two parties to deliver and pay for an asset in the future. 
B)  A futures contract is a non-standardised contract between two parties to deliver and pay for an asset in the future. 
C)  A futures contract is a standardised contract guaranteed by organised exchanges to deliver and pay for an asset in the future. 
D)  A futures contract is a non-standardised contract b guaranteed by organised exchanges to deliver and pay for an asset in the future.

Question 19

The term 'recourse' refers to the ability to put an asset or loan back to the seller should the:

Accepted Answer

A)  asset need to be entirely written off. 
B)  credit quality of that asset improve. 
C)  buyer not need the asset any longer. 
D)  credit quality of that asset deteriorate. 
A)  asset need to be entirely written off. 
B)  credit quality of that asset improve. 
C)  buyer not need the asset any longer. 
D)  credit quality of that asset deteriorate.

Question 20

Under an interest rate cap, in return for a fee the seller promises to compensate the buyer should interest rates remain under a certain level.

Accepted Answer

A) True 
 B)False

Which of the following statements is true?

Assume that the market value of assets is $120 and the market value of liabilities is $90. What is the bank's net worth?

Including on-balance-sheet and off-balance-sheet activities, a bank's net worth is calculated as:

Back-end fees are charged as a certain percentage of:

The current market value of an off-balance-sheet item is determined by finding the current market value of the underlying item.

Interest rate risk is part of the loan commitment contingent risk because of the uncertainty of changes in interest rates before the borrower exercises his option to borrow.

FIs may issue standby letters of credit to cover contingencies that are potentially more severe, less predictable and not necessarily trade related.

The 'face value of an OBS item' is also referred to as the notional value.

Which of the following contingent risks are most likely to be created if a bank provides a loan commitment?

How do you interpret a delta of 0.30?

Assume a bank has bought a call option on bonds with a notional value of $200. Further assume that and that the delta of the option is calculated at 0.45. What is the contingent asset value (round to two decimals)?

Which of the following statements is true?

Takedown or draw-down risk in a loan commitment exposes the FI to:

An exporter demands a letter of credit in order to:

An Adverse material changes in conditions clause is included in loan commitments to protect the FI against:

Which of the following statements is true?

The term 'recourse' refers to the ability to put an asset or loan back to the seller should the:

Under an interest rate cap, in return for a fee the seller promises to compensate the buyer should interest rates remain under a certain level.

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off Balance Sheet Instruments

Credit Risk I: Individual Loan Risk

Market Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Technology and Other Operational Risk

Capital Management and Adequacy

Filters

Exam 16: Off-Balance-Sheet Activities

Which of the following statements is true?

Assume that the market value of assets is $120 and the market value of liabilities is $90. What is the bank's net worth?

Including on-balance-sheet and off-balance-sheet activities, a bank's net worth is calculated as:

Back-end fees are charged as a certain percentage of:

The current market value of an off-balance-sheet item is determined by finding the current market value of the underlying item.

Interest rate risk is part of the loan commitment contingent risk because of the uncertainty of changes in interest rates before the borrower exercises his option to borrow.

FIs may issue standby letters of credit to cover contingencies that are potentially more severe, less predictable and not necessarily trade related.

The 'face value of an OBS item' is also referred to as the notional value.

Which of the following contingent risks are most likely to be created if a bank provides a loan commitment?

How do you interpret a delta of 0.30?

Assume a bank has bought a call option on bonds with a notional value of $200. Further assume that and that the delta of the option is calculated at 0.45. What is the contingent asset value (round to two decimals)?

Which of the following statements is true?

Takedown or draw-down risk in a loan commitment exposes the FI to:

An exporter demands a letter of credit in order to:

An Adverse material changes in conditions clause is included in loan commitments to protect the FI against:

Which of the following statements is true?

The term 'recourse' refers to the ability to put an asset or loan back to the seller should the:

Under an interest rate cap, in return for a fee the seller promises to compensate the buyer should interest rates remain under a certain level.

Why Are Financial Institutions Special

The Financial Services Industry: Depository Institutions

The Financial Services Industry: Other Financial Institutions

Risk of Financial Institutions

Interest Rate Risk Measurement: The Repricing Model

Interest Rate Risk Measurement: the Duration Model

Managing Interest Rate Risk Using Off Balance Sheet Instruments

Credit Risk I: Individual Loan Risk

Market Risk

Credit Risk I: Individual Loan Risk

Credit Risk II: Loan Portfolio and Concentration Risk

Sovereign Risk

Foreign Exchange Risk

Liquidity Risk

Liability and Liquidity Management

Technology and Other Operational Risk

Capital Management and Adequacy

Filters