Question 1

Rising interest rates will cause the market value of

Accepted Answer

A) call options on bonds to increase. 
B) put options on bonds to decrease. 
C) call options on bonds to decrease. 
D) bond futures to increase. 
E) Answers A and B only. 
A) call options on bonds to increase. 
B) put options on bonds to decrease. 
C) call options on bonds to decrease. 
D) bond futures to increase. 
E) Answers A and B only.

Question 2

Which of the following shows the change in the value of a put option for each $1 change in the underlying bond?

Accepted Answer

A) Open interest. 
B) Volatility. 
C) Delta. 
D) Basis. 
E) Sigma. 
A) Open interest. 
B) Volatility. 
C) Delta. 
D) Basis. 
E) Sigma.

Question 3

A hedge of interest rate risk with a put option completely offsets gains but only partly offsets losses.

Accepted Answer

A) True 
 B)False

Question 4

The loss to the buyer of a bond option is unlimited.

Accepted Answer

A) True 
 B)False

Question 5

The gain to the writer of a bond option is unlimited.

Accepted Answer

A) True 
 B)False

Question 6

The premium on a credit spread call option is the maximum loss attainable to the buyer of the option in situations where the credit spread increases.

Accepted Answer

A) True 
 B)False

Question 7

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. 
E) pays a premium and has the obligation 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. 
E) pays a premium and has the obligation to buy the underlying bond at the agreed exercise price.

Question 8

A bank purchases a 3-year, 6 percent $5 million cap (call options on interest rates), where payments are paid or received at the end of year 2 and 3 as shown below: $$\begin{array} { | l | c | c | c | c | } 
\hline \text { End of Year: } & 0 & 1 & 2 & 3 \
\hline \text { Cash Flow at end of year: } & - & - & \mathrm { x } & \mathrm { x } \
\hline
\end{array}$$
-In addition to purchasing the cap, if the bank also sells a 3-year 6 percent floor and interest rates are 5 percent and 7 percent in years 2 and 3, respectively, what are the payoffs to the bank? Specifically, the bank

Accepted Answer

A) receive $50,000 at the end of year 2 and receive $50,000 at the end of year 3. 
B) pay $50,000 at the end of year 2 and receive $50,000 at the end of year 3. 
C) receive $0 at the end of year 2 and pay $50,000 at the end of year 3. 
D) receive $0 at the end of year 2 and $50,000 at the end of year 3. 
E) receive $50,000 at the end of year 2 and pay $0 at the end of year 3. 
A) receive $50,000 at the end of year 2 and receive $50,000 at the end of year 3. 
B) pay $50,000 at the end of year 2 and receive $50,000 at the end of year 3. 
C) receive $0 at the end of year 2 and pay $50,000 at the end of year 3. 
D) receive $0 at the end of year 2 and $50,000 at the end of year 3. 
E) receive $50,000 at the end of year 2 and pay $0 at the end of year 3.

Question 9

A digital default option expires unexercised in situations where the loan is paid in accordance with the loan agreement.

Accepted Answer

A) True 
 B)False

Question 10

The writer of a bond put option

Accepted Answer

A) receives a premium in return for standing ready to sell the bond at the exercise price. 
B) receives a premium in return for standing 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 
E) pays a premium and has the obligation to buy the underlying bond at the agreed exercise price 
A) receives a premium in return for standing ready to sell the bond at the exercise price. 
B) receives a premium in return for standing 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 
E) pays a premium and has the obligation to buy the underlying bond at the agreed exercise price

Question 11

As of June 2012, commercial banks had listed for sale option contracts with a notational value of approximately

Accepted Answer

A) $16.2 trillion. 
B) $33.6 trillion. 
C) $8.1 trillion. 
D) $51.0 trillion. 
E) $36.9 trillion. 
A) $16.2 trillion. 
B) $33.6 trillion. 
C) $8.1 trillion. 
D) $51.0 trillion. 
E) $36.9 trillion.

Question 12

The losses on a purchased put option position when rates fall are limited to the option premium paid.

Accepted Answer

A) True 
 B)False

Question 13

An FI buys a collar by buying a floor and selling a cap.

Accepted Answer

A) True 
 B)False

Question 14

The buyer of a bond put option stands to make a profit if changes in market interest rates cause the bond price to fall below the exercise price.

Accepted Answer

A) True 
 B)False

Question 15

The buyer of a bond call option

Accepted Answer

A) receives a premium in return for standing ready to sell the bond at the exercise price. 
B) receives a premium in return for standing 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 
E) pays a premium and has the obligation to buy the underlying bond at the agreed exercise price 
A) receives a premium in return for standing ready to sell the bond at the exercise price. 
B) receives a premium in return for standing 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 
E) pays a premium and has the obligation to buy the underlying bond at the agreed exercise price

Question 16

Buying a call option on a bond ensures a bank that it will be able to sell the bond at a given point in time for a price at least equal to the exercise price of the option.

Accepted Answer

A) True 
 B)False

Question 17

The payoffs on bond call options move symmetrically with changes in interest rates.

Accepted Answer

A) True 
 B)False

Question 18

A digital default option

Accepted Answer

A) always pays the par value of a loan if exercised. 
B) has a payout that is capped at 80 percent of the par value of the loan. 
C) will cause the FI never to lose more than the premium paid to purchase the option. 
D) Answers A and C only. 
E) Answers A and B only. 
A) always pays the par value of a loan if exercised. 
B) has a payout that is capped at 80 percent of the par value of the loan. 
C) will cause the FI never to lose more than the premium paid to purchase the option. 
D) Answers A and C only. 
E) Answers A and B only.

Question 19

The profit on bond call options moves asymmetrically with interest rates.

Accepted Answer

A) True 
 B)False

Question 20

The outstanding number of put or call contracts is called

Accepted Answer

A) open interest. 
B) pull-to-par. 
C) cap. 
D) floor. 
E) collar. 
A) open interest. 
B) pull-to-par. 
C) cap. 
D) floor. 
E) collar.

Exam 23: Options, Caps, Floors, and Collars

Rising interest rates will cause the market value of

Which of the following shows the change in the value of a put option for each $1 change in the underlying bond?

A hedge of interest rate risk with a put option completely offsets gains but only partly offsets losses.

The loss to the buyer of a bond option is unlimited.

The gain to the writer of a bond option is unlimited.

The premium on a credit spread call option is the maximum loss attainable to the buyer of the option in situations where the credit spread increases.

The writer of a bond call option

A digital default option expires unexercised in situations where the loan is paid in accordance with the loan agreement.

The writer of a bond put option

As of June 2012, commercial banks had listed for sale option contracts with a notational value of approximately

The losses on a purchased put option position when rates fall are limited to the option premium paid.

An FI buys a collar by buying a floor and selling a cap.

The buyer of a bond put option stands to make a profit if changes in market interest rates cause the bond price to fall below the exercise price.

The buyer of a bond call option

Buying a call option on a bond ensures a bank that it will be able to sell the bond at a given point in time for a price at least equal to the exercise price of the option.

The payoffs on bond call options move symmetrically with changes in interest rates.

A digital default option

The profit on bond call options moves asymmetrically with interest rates.

The outstanding number of put or call contracts is called

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