Question 1

Which of the following best describes a derivative contract?

Accepted Answer

A)  Contractual commitments to make a loan up to a stated amount at a given interest rate in the future. 
B)  Contingent guarantees sold by an FI to underwrite the performance of the buyer of the guaranty. 
C)  Agreement between two parties to exchange a standard quantity of an asset at a predetermined price at a specified date in the future. 
D)  Trading in securities prior to their actual issue. 
A)  Contractual commitments to make a loan up to a stated amount at a given interest rate in the future. 
B)  Contingent guarantees sold by an FI to underwrite the performance of the buyer of the guaranty. 
C)  Agreement between two parties to exchange a standard quantity of an asset at a predetermined price at a specified date in the future. 
D)  Trading in securities prior to their actual issue.

Question 2

Basis risk occurs on a loan commitment because the spread of a pricing index over the cost of funds may vary.

Accepted Answer

A) True 
 B)False

Question 3

For a currency that has a futures contract, basis risk is not typically a problem as $1 is the same as any other $1.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following statements is true?

Accepted Answer

A)  In equity markets, delivery and cash settlement normally occur two business days after the spot agreement. 
B)  In equity markets, delivery and cash settlement normally occur three business days after the spot agreement. 
C)  In equity markets, delivery and cash settlement normally occur four business days after the spot agreement. 
D)  In equity markets, delivery and cash settlement normally occur five business days after the spot agreement. 
A)  In equity markets, delivery and cash settlement normally occur two business days after the spot agreement. 
B)  In equity markets, delivery and cash settlement normally occur three business days after the spot agreement. 
C)  In equity markets, delivery and cash settlement normally occur four business days after the spot agreement. 
D)  In equity markets, delivery and cash settlement normally occur five business days after the spot agreement.

Question 5

Which of the following statements is true?

Accepted Answer

A)  The mismatches between changes in the price of the exposure and the value of the instrument used to hedge the position is called value risk. 
B)  The mismatches between changes in the price of the exposure and the value of the instrument used to hedge the position is called basis risk. 
C)  The mismatches between changes in the price of the exposure and the value of the instrument used to hedge the position is called gap risk. 
D)  The mismatches between changes in the price of the exposure and the value of the instrument used to hedge the position is called fundamental risk. 
A)  The mismatches between changes in the price of the exposure and the value of the instrument used to hedge the position is called value risk. 
B)  The mismatches between changes in the price of the exposure and the value of the instrument used to hedge the position is called basis risk. 
C)  The mismatches between changes in the price of the exposure and the value of the instrument used to hedge the position is called gap risk. 
D)  The mismatches between changes in the price of the exposure and the value of the instrument used to hedge the position is called fundamental risk.

Question 6

Financial futures are used by FIs to manage:

Accepted Answer

A)  credit risk. 
B)  interest rate risk. 
C)  liquidity risk. 
D)  sovereign country risk. 
A)  credit risk. 
B)  interest rate risk. 
C)  liquidity risk. 
D)  sovereign country risk.

Question 7

Within the futures market, to be fully hedged means:

Accepted Answer

A)  Buying a sufficient number of futures contracts so that the loss of net worth on the FI's balance sheet when interest rates rise is just offset by the gain from the off-balance-sheet selling of futures when interest rates rise. 
B)  Selling a sufficient number of futures contracts so that the loss of net worth on the FI's balance sheet when interest rates rise is just offset by the gain from the off-balance-sheet selling of futures when interest rates rise. 
C)  Selling a sufficient number of futures contracts so that the gain of net worth on the FI's balance sheet when interest rates rise is just offset by the gain from the off-balance-sheet selling of futures when interest rates rise. 
D)  None of the listed options are correct. 
A)  Buying a sufficient number of futures contracts so that the loss of net worth on the FI's balance sheet when interest rates rise is just offset by the gain from the off-balance-sheet selling of futures when interest rates rise. 
B)  Selling a sufficient number of futures contracts so that the loss of net worth on the FI's balance sheet when interest rates rise is just offset by the gain from the off-balance-sheet selling of futures when interest rates rise. 
C)  Selling a sufficient number of futures contracts so that the gain of net worth on the FI's balance sheet when interest rates rise is just offset by the gain from the off-balance-sheet selling of futures when interest rates rise. 
D)  None of the listed options are correct.

Question 8

Some futures exchanges have deliverable bond futures, meaning that at the contract's expiry holders of bought futures positions must take physical delivery and sellers must make delivery.

Accepted Answer

A) True 
 B)False

Question 9

As interest rates increase, the writer of a bond call option stands to make:

Accepted Answer

A)  limited gains. 
B)  limited losses. 
C)  unlimited losses. 
D)  unlimited gains. 
A)  limited gains. 
B)  limited losses. 
C)  unlimited losses. 
D)  unlimited gains.

Question 10

An undeliverable futures contract refers to a futures contract in which:

Accepted Answer

A)  there is no physical settlement. 
B)  there is no mandatory cash settlement. 
C)  one of the parties is unable to deliver. 
D)  money has been lost due to a party having chosen an unfavourable hedging strategy. 
A)  there is no physical settlement. 
B)  there is no mandatory cash settlement. 
C)  one of the parties is unable to deliver. 
D)  money has been lost due to a party having chosen an unfavourable hedging strategy.

Question 11

Which of the following are contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a pre-specified price for a specified time period?

Accepted Answer

A)  options 
B)  futures 
C)  forwards 
D)  swaps 
A)  options 
B)  futures 
C)  forwards 
D)  swaps

Question 12

The writer of a bond call option:

Accepted Answer

A)  receives a premium and must stand ready to sell the bond at the exercise price. 
B)  receives a premium and must stand 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. 
A)  receives a premium and must stand ready to sell the bond at the exercise price. 
B)  receives a premium and must stand 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.

Question 13

An agreement between a buyer and a seller at time 0 where the seller of an asset agrees to deliver an asset immediately and the buyer agrees to pay for the asset immediately is the characteristic of a:

Accepted Answer

A)  spot contract. 
B)  forward contract. 
C)  futures contract. 
D)  put options contract. 
A)  spot contract. 
B)  forward contract. 
C)  futures contract. 
D)  put options contract.

Question 14

Which of the following is an adequate definition of conversion factor?

Accepted Answer

A)  A factor used to calculate the invoice price on a futures contract when a bond other than the benchmark bond is delivered to the buyer. 
B)  A factor used to calculate the invoice price on a futures contract when the benchmark bond is delivered to the buyer. 
C)  A factor used to calculate the invoice price on a futures contract when a bond other than the benchmark bond is delivered to the seller. 
D)  A factor used to calculate the invoice price on a futures contract when the benchmark bond is delivered to the seller. 
A)  A factor used to calculate the invoice price on a futures contract when a bond other than the benchmark bond is delivered to the buyer. 
B)  A factor used to calculate the invoice price on a futures contract when the benchmark bond is delivered to the buyer. 
C)  A factor used to calculate the invoice price on a futures contract when a bond other than the benchmark bond is delivered to the seller. 
D)  A factor used to calculate the invoice price on a futures contract when the benchmark bond is delivered to the seller.

Question 15

What is a difference between a forward contract and a future contract?

Accepted Answer

A)  The settlement price of a forward contract is fixed over the life of the contract but in a futures contract is marked to market daily. 
B)  Forward contracts are normally arranged through an organised exchange, while most futures contracts are OTC contracts. 
C)  Both are essentially the same, except for the fact that the terms of a forward contract is set by the exchange, subject to the approval of the SFE. 
D)  Delivery of the underlying asset almost always occurs on a futures contract but almost never occurs on a forward contract. 
A)  The settlement price of a forward contract is fixed over the life of the contract but in a futures contract is marked to market daily. 
B)  Forward contracts are normally arranged through an organised exchange, while most futures contracts are OTC contracts. 
C)  Both are essentially the same, except for the fact that the terms of a forward contract is set by the exchange, subject to the approval of the SFE. 
D)  Delivery of the underlying asset almost always occurs on a futures contract but almost never occurs on a forward contract.

Question 16

The Sydney Futures Exchange only offers cash-settled contracts.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is a common use of FRAs?

Accepted Answer

A)  To lock in an interest rate on relatively shorter term borrowings. 
B)  To lock in an interest rate on medium-term borrowings. 
C)  To lock in an interest rate on relatively longer term borrowings. 
D)  To lock in an interest rate on any term of borrowings. 
A)  To lock in an interest rate on relatively shorter term borrowings. 
B)  To lock in an interest rate on medium-term borrowings. 
C)  To lock in an interest rate on relatively longer term borrowings. 
D)  To lock in an interest rate on any term of borrowings.

Question 18

An Australian bank must pay US$10 million in 90 days. It wishes to hedge the risk in the futures market. To do so, the bank should:

Accepted Answer

A)  buy A$10 million in US dollar futures. 
B)  sell A$10 million in US dollar futures, with three-month maturity. 
C)  buy US$10 million in US dollar futures. 
D)  sell US$10 million in US dollar futures 
A)  buy A$10 million in US dollar futures. 
B)  sell A$10 million in US dollar futures, with three-month maturity. 
C)  buy US$10 million in US dollar futures. 
D)  sell US$10 million in US dollar futures

Question 19

All call options are eventually exercised and the underlying asset must be delivered.

Accepted Answer

A) True 
 B)False

Question 20

The dollar value of the outstanding futures position depends on the:

Accepted Answer

A)  number of contracts bought and sold and the price of each contract. 
B)  cash exposure ratio. 
C)  number of contracts bought and sold and the change in interest rates. 
D)  contracts that should be sold per dollar of cash exposure. 
A)  number of contracts bought and sold and the price of each contract. 
B)  cash exposure ratio. 
C)  number of contracts bought and sold and the change in interest rates. 
D)  contracts that should be sold per dollar of cash exposure.

Which of the following best describes a derivative contract?

Basis risk occurs on a loan commitment because the spread of a pricing index over the cost of funds may vary.

For a currency that has a futures contract, basis risk is not typically a problem as $1 is the same as any other $1.

Which of the following statements is true?

Which of the following statements is true?

Financial futures are used by FIs to manage:

Within the futures market, to be fully hedged means:

Some futures exchanges have deliverable bond futures, meaning that at the contract's expiry holders of bought futures positions must take physical delivery and sellers must make delivery.

As interest rates increase, the writer of a bond call option stands to make:

An undeliverable futures contract refers to a futures contract in which:

Which of the following are contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a pre-specified price for a specified time period?

The writer of a bond call option:

An agreement between a buyer and a seller at time 0 where the seller of an asset agrees to deliver an asset immediately and the buyer agrees to pay for the asset immediately is the characteristic of a:

Which of the following is an adequate definition of conversion factor?

What is a difference between a forward contract and a future contract?

The Sydney Futures Exchange only offers cash-settled contracts.

Which of the following is a common use of FRAs?

An Australian bank must pay US$10 million in 90 days. It wishes to hedge the risk in the futures market. To do so, the bank should:

All call options are eventually exercised and the underlying asset must be delivered.

The dollar value of the outstanding futures position depends on the:

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

Which of the following best describes a derivative contract?

Basis risk occurs on a loan commitment because the spread of a pricing index over the cost of funds may vary.

For a currency that has a futures contract, basis risk is not typically a problem as $1 is the same as any other $1.

Which of the following statements is true?

Which of the following statements is true?

Financial futures are used by FIs to manage:

Within the futures market, to be fully hedged means:

Some futures exchanges have deliverable bond futures, meaning that at the contract's expiry holders of bought futures positions must take physical delivery and sellers must make delivery.

As interest rates increase, the writer of a bond call option stands to make:

An undeliverable futures contract refers to a futures contract in which:

Which of the following are contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a pre-specified price for a specified time period?

The writer of a bond call option:

An agreement between a buyer and a seller at time 0 where the seller of an asset agrees to deliver an asset immediately and the buyer agrees to pay for the asset immediately is the characteristic of a:

Which of the following is an adequate definition of conversion factor?

What is a difference between a forward contract and a future contract?

The Sydney Futures Exchange only offers cash-settled contracts.

Which of the following is a common use of FRAs?

An Australian bank must pay US$10 million in 90 days. It wishes to hedge the risk in the futures market. To do so, the bank should:

All call options are eventually exercised and the underlying asset must be delivered.

The dollar value of the outstanding futures position depends on the:

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