Question 1

The benefit of a futures exchange is:

Accepted Answer

A)  elimination of customer risk exposure. 
B)  provision of clearing services. 
C)  guarantee of trading volume. 
D)  intervention on the trader's behalf with government regulators. 
A)  elimination of customer risk exposure. 
B)  provision of clearing services. 
C)  guarantee of trading volume. 
D)  intervention on the trader's behalf with government regulators. B

Question 2

Which of the following statements is true?

Accepted Answer

A)  In a futures contract the buyer and seller agree on a price at time 0 and the bonds are delivered by the seller to the buyer 'at that time'. 
B)  In a futures contract the buyer and seller agree on a price at time 0 and the bonds are delivered by the seller at a future point in time, e.g. after three months. 
C)  In a futures contract the buyer and seller enter into a contract at time 0, the contract is marked-to-market on a daily basis, and the buyer pays the futures price quoted at expiry. 
D)  None of the listed options are correct. 
A)  In a futures contract the buyer and seller agree on a price at time 0 and the bonds are delivered by the seller to the buyer 'at that time'. 
B)  In a futures contract the buyer and seller agree on a price at time 0 and the bonds are delivered by the seller at a future point in time, e.g. after three months. 
C)  In a futures contract the buyer and seller enter into a contract at time 0, the contract is marked-to-market on a daily basis, and the buyer pays the futures price quoted at expiry. 
D)  None of the listed options are correct. C

Question 3

Which of the following statements is true?

Accepted Answer

A)  A very actively traded spot contract is the spot rate agreement (SR
A) . 
B)  A very actively traded spot contract is the futures rate agreement (FR
A) . 
C)  A very actively traded forward contract is the forward rate agreement (FR
A) , commonly used to lock in the interest rate on shorter-term borrowings. 
D)  A very actively traded spot contract is the option rate agreement (OR
A) , commonly used to grant the right to buy or sell an asset at a specified price. 
A)  A very actively traded spot contract is the spot rate agreement (SR
A) . 
B)  A very actively traded spot contract is the futures rate agreement (FR
A) . 
C)  A very actively traded forward contract is the forward rate agreement (FR
A) , commonly used to lock in the interest rate on shorter-term borrowings. 
D)  A very actively traded spot contract is the option rate agreement (OR
A) , commonly used to grant the right to buy or sell an asset at a specified price. C

Question 4

A forward contract:

Accepted Answer

A)  has more credit risk than a futures contract. 
B)  is more standardised than a futures contract. 
C)  is marked to market more frequently than a futures contract. 
D)  has a shorter time to delivery than a futures contract. 
E)  is less risky than a futures contract. 
A)  has more credit risk than a futures contract. 
B)  is more standardised than a futures contract. 
C)  is marked to market more frequently than a futures contract. 
D)  has a shorter time to delivery than a futures contract. 
E)  is less risky than a futures contract.

Question 5

Which of the following statements is true?

Accepted Answer

A)  Micro-hedging refers to hedging the entire duration gap of an FI using futures or forward contracts. 
B)  Macro-hedging refers to hedging the entire duration gap of an FI using futures or forward contracts. 
C)  Micro-hedging refers to hedging the entire balance sheet of an FI using futures or forward contracts. 
D)  Macro-hedging refers to hedging the entire balance sheet of an FI using futures or forward contracts. 
A)  Micro-hedging refers to hedging the entire duration gap of an FI using futures or forward contracts. 
B)  Macro-hedging refers to hedging the entire duration gap of an FI using futures or forward contracts. 
C)  Micro-hedging refers to hedging the entire balance sheet of an FI using futures or forward contracts. 
D)  Macro-hedging refers to hedging the entire balance sheet of an FI using futures or forward contracts.

Question 6

Which of the following statements is true?

Accepted Answer

A)  The advantage of using forwards for creating a synthetic fixed rate position is that there are no cash flows until the contract matures. 
B)  The advantage of using futures for creating a synthetic fixed rate position is that futures contracts are standardised. 
C)  The advantage of using forwards for creating a synthetic fixed rate position is that futures contracts are standardised. 
D)  The advantage of using futures for creating a synthetic fixed rate position is that there are no cash flows until the contract matures. 
A)  The advantage of using forwards for creating a synthetic fixed rate position is that there are no cash flows until the contract matures. 
B)  The advantage of using futures for creating a synthetic fixed rate position is that futures contracts are standardised. 
C)  The advantage of using forwards for creating a synthetic fixed rate position is that futures contracts are standardised. 
D)  The advantage of using futures for creating a synthetic fixed rate position is that there are no cash flows until the contract matures.

Question 7

Which of the following statements is true?

Accepted Answer

A)  In a futures contract, daily cash flows pass, via the clearing house, between the buyer and seller in response to the mark-to-market process. 
B)  In a forward contract, daily cash flows pass, via the clearing house, between the buyer and seller in response to the mark-to-market process. 
C)  In a futures contract, daily cash flows pass, via the clearing house, between the buyer and seller in response to the mark-to-book value process. 
D)  In a forward contract, daily cash flows pass, via the clearing house, between the buyer and seller in response to the mark-to-book value process. 
A)  In a futures contract, daily cash flows pass, via the clearing house, between the buyer and seller in response to the mark-to-market process. 
B)  In a forward contract, daily cash flows pass, via the clearing house, between the buyer and seller in response to the mark-to-market process. 
C)  In a futures contract, daily cash flows pass, via the clearing house, between the buyer and seller in response to the mark-to-book value process. 
D)  In a forward contract, daily cash flows pass, via the clearing house, between the buyer and seller in response to the mark-to-book value process.

Question 8

An FI portfolio manager holds 10 year $1 million face value bonds. At time 0, these bonds are valued at $95 per $100 of face value and the manager expects interest rates to rise over the next three months. What should the manager do?

Accepted Answer

A)  The FI portfolio manager should leave the position untouched as changes in the interest rate have no impact on bond prices. 
B)  The FI portfolio manager should leave the position untouched as an increase in interest rates will lead to higher bond prices. 
C)  The FI portfolio manager should hedge the position by selling a three months forward contract with a face value of $1 million. 
D)  The FI portfolio manager should hedge the position by buying a three months forward contract with a face value of $1 million. 
A)  The FI portfolio manager should leave the position untouched as changes in the interest rate have no impact on bond prices. 
B)  The FI portfolio manager should leave the position untouched as an increase in interest rates will lead to higher bond prices. 
C)  The FI portfolio manager should hedge the position by selling a three months forward contract with a face value of $1 million. 
D)  The FI portfolio manager should hedge the position by buying a three months forward contract with a face value of $1 million.

Question 9

In a put option on a bond, the:

Accepted Answer

A)  seller of the put option is committed to receive the underlying bond at a specified time. 
B)  B: buyer of the put option is committed to handing over the specified bond at a specified time to the seller of the option. 
C)  C: buyer of the option is committed to receive the underlying bond at a specified time. 
D)  D: seller of the bond is committed to handing over the specified bond at a specified time. 
A)  seller of the put option is committed to receive the underlying bond at a specified time. 
B)  B: buyer of the put option is committed to handing over the specified bond at a specified time to the seller of the option. 
C)  C: buyer of the option is committed to receive the underlying bond at a specified time. 
D)  D: seller of the bond is committed to handing over the specified bond at a specified time.

Question 10

Which of the following statements is true?

Accepted Answer

A)  Marking to market refers to the process by which the prices on outstanding futures contracts are adjusted each hour to reflect current futures market conditions. 
B)  Marking to market refers to the process by which the prices on outstanding futures contracts are adjusted each day to reflect current futures market conditions. 
C)  Marking to market refers to the process by which the prices on outstanding futures contracts are adjusted each week to reflect current futures market conditions. 
D)  A Marking to market refers to the process by which the prices on outstanding futures contracts are adjusted each month to reflect current futures market conditions. 
A)  Marking to market refers to the process by which the prices on outstanding futures contracts are adjusted each hour to reflect current futures market conditions. 
B)  Marking to market refers to the process by which the prices on outstanding futures contracts are adjusted each day to reflect current futures market conditions. 
C)  Marking to market refers to the process by which the prices on outstanding futures contracts are adjusted each week to reflect current futures market conditions. 
D)  A Marking to market refers to the process by which the prices on outstanding futures contracts are adjusted each month to reflect current futures market conditions.

Question 11

An interest rate swap is a succession of forward contracts on interest rates arranged by two parties that allows for the exchange of fixed interest payments for floating payments; as such it allows a FI to place a long-term hedge.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements is true?

Accepted Answer

A)  In a forward contract the buyer and seller agree on a price at time 0 and the bonds are delivered by the seller to the buyer 'at that time'. 
B)  In a forward contract the buyer and seller agree on a price at time 0 and the bonds are delivered by the seller at a future point in time, e.g. after three months. 
C)  In a forward contract the buyer and seller enter into a contract at time 0, the contract is marked-to-market on a daily basis, and the buyer pays the forward price quoted at expiry. 
D)  None of the listed options are correct. 
A)  In a forward contract the buyer and seller agree on a price at time 0 and the bonds are delivered by the seller to the buyer 'at that time'. 
B)  In a forward contract the buyer and seller agree on a price at time 0 and the bonds are delivered by the seller at a future point in time, e.g. after three months. 
C)  In a forward contract the buyer and seller enter into a contract at time 0, the contract is marked-to-market on a daily basis, and the buyer pays the forward price quoted at expiry. 
D)  None of the listed options are correct.

Question 13

Forwards are on-balance-sheet transactions.

Accepted Answer

A) True 
 B)False

Question 14

In a put option, the purchaser of the bond option is committed to handing over the specified bond at a specified time.

Accepted Answer

A) True 
 B)False

Question 15

In a 'plain Vanilla swap' the swap buyer agrees to make:

Accepted Answer

A)  fixed interest payments to the swap seller on a loan that is originally floating, but which is then modified through the use of derivatives to turn it into a fixed-rate loan. 
B)  fixed interest payments to the swap seller on a loan that is originally fixed, but which is then modified through the use of derivatives to turn it into a floating-rate loan. 
C)  floating interest payments to the swap seller on a loan that is originally floating, but which is then modified through the use of derivatives to turn it into a fixed loan. 
D)  None of the listed options are correct. 
A)  fixed interest payments to the swap seller on a loan that is originally floating, but which is then modified through the use of derivatives to turn it into a fixed-rate loan. 
B)  fixed interest payments to the swap seller on a loan that is originally fixed, but which is then modified through the use of derivatives to turn it into a floating-rate loan. 
C)  floating interest payments to the swap seller on a loan that is originally floating, but which is then modified through the use of derivatives to turn it into a fixed loan. 
D)  None of the listed options are correct.

Question 16

A futures contract:

Accepted Answer

A)  is tailor-made to fit the needs of the buyer and the seller. 
B)  has more price risk than a forward contract 
C)  is marked to market more frequently than a forward contract. 
D)  has a shorter time to delivery than a forward contract. 
A)  is tailor-made to fit the needs of the buyer and the seller. 
B)  has more price risk than a forward contract 
C)  is marked to market more frequently than a forward contract. 
D)  has a shorter time to delivery than a forward contract.

Question 17

A major difference between a forward and a futures contract:

Accepted Answer

A)  is the forward has less credit risk than a futures contract. 
B)  is the forward contract is tailor-made to fit the needs of the buyer. 
C)  is the forward contract is marked to market more frequently than a futures contract. 
D)  is the forward contract rarely has final delivery of the asset. 
A)  is the forward has less credit risk than a futures contract. 
B)  is the forward contract is tailor-made to fit the needs of the buyer. 
C)  is the forward contract is marked to market more frequently than a futures contract. 
D)  is the forward contract rarely has final delivery of the asset.

Question 18

The final settlement in which all bought and sold futures contracts in existence at the close of trading in the contract month are settled at the cash settlement price is called a:

Accepted Answer

A)  periodical cash settlement. 
B)  mandatory cash settlement. 
C)  monthly cash settlement. 
D)  final cash settlement. 
A)  periodical cash settlement. 
B)  mandatory cash settlement. 
C)  monthly cash settlement. 
D)  final cash settlement.

Question 19

An FI has reduced its interest rate risk exposure to the lowest possible level by selling sufficient futures to offset the risk exposure of its whole balance sheet or cash positions in each asset and liability. The FI is involved in:

Accepted Answer

A)  micro-hedging. 
B)  selective hedging. 
C)  routine hedging. 
D)  over-hedging. 
A)  micro-hedging. 
B)  selective hedging. 
C)  routine hedging. 
D)  over-hedging.

Question 20

Which of the following is a reason why the default risk of a futures contract is assumed to be less than that of a forward contract?

Accepted Answer

A)  Forward contracts are classified as exotic derivatives. 
B)  Margin requirements on futures. 
C)  More flexibility as the buyer can decide whether or not to exercise the contract at maturity. 
D)  None of the listed options are correct, as the default risk of a futures contract is generally considered to be higher than that of a forward contract. 
A)  Forward contracts are classified as exotic derivatives. 
B)  Margin requirements on futures. 
C)  More flexibility as the buyer can decide whether or not to exercise the contract at maturity. 
D)  None of the listed options are correct, as the default risk of a futures contract is generally considered to be higher than that of a forward contract.

The benefit of a futures exchange is:

Which of the following statements is true?

Which of the following statements is true?

A forward contract:

Which of the following statements is true?

Which of the following statements is true?

Which of the following statements is true?

An FI portfolio manager holds 10 year $1 million face value bonds. At time 0, these bonds are valued at $95 per $100 of face value and the manager expects interest rates to rise over the next three months. What should the manager do?

In a put option on a bond, the:

Which of the following statements is true?

An interest rate swap is a succession of forward contracts on interest rates arranged by two parties that allows for the exchange of fixed interest payments for floating payments; as such it allows a FI to place a long-term hedge.

Which of the following statements is true?

Forwards are on-balance-sheet transactions.

In a put option, the purchaser of the bond option is committed to handing over the specified bond at a specified time.

In a 'plain Vanilla swap' the swap buyer agrees to make:

A futures contract:

A major difference between a forward and a futures contract:

The final settlement in which all bought and sold futures contracts in existence at the close of trading in the contract month are settled at the cash settlement price is called a:

An FI has reduced its interest rate risk exposure to the lowest possible level by selling sufficient futures to offset the risk exposure of its whole balance sheet or cash positions in each asset and liability. The FI is involved in:

Which of the following is a reason why the default risk of a futures contract is assumed to be less than that of a forward contract?

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

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

Off-Balance-Sheet Activities

Technology and Other Operational Risk

Capital Management and Adequacy

Filters

Exam 7: Managing Interest Rate Risk Using Off Balance Sheet Instruments

The benefit of a futures exchange is:

Which of the following statements is true?

Which of the following statements is true?

A forward contract:

Which of the following statements is true?

Which of the following statements is true?

Which of the following statements is true?

An FI portfolio manager holds 10 year $1 million face value bonds. At time 0, these bonds are valued at $95 per $100 of face value and the manager expects interest rates to rise over the next three months. What should the manager do?

In a put option on a bond, the:

Which of the following statements is true?

An interest rate swap is a succession of forward contracts on interest rates arranged by two parties that allows for the exchange of fixed interest payments for floating payments; as such it allows a FI to place a long-term hedge.

Which of the following statements is true?

Forwards are on-balance-sheet transactions.

In a put option, the purchaser of the bond option is committed to handing over the specified bond at a specified time.

In a 'plain Vanilla swap' the swap buyer agrees to make:

A futures contract:

A major difference between a forward and a futures contract:

The final settlement in which all bought and sold futures contracts in existence at the close of trading in the contract month are settled at the cash settlement price is called a:

An FI has reduced its interest rate risk exposure to the lowest possible level by selling sufficient futures to offset the risk exposure of its whole balance sheet or cash positions in each asset and liability. The FI is involved in:

Which of the following is a reason why the default risk of a futures contract is assumed to be less than that of a forward contract?

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

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

Off-Balance-Sheet Activities

Technology and Other Operational Risk

Capital Management and Adequacy

Filters