Question 1

In the early 1980s:

Accepted Answer

A) banks increased their off-balance-sheet activities to avoid regulatory taxes. 
B) banks decreased their off-balance-sheet activities to avoid regulatory costs. 
C) banks decreased their off-balance-sheet activities to avoid competition from nonbank banks. 
D) banks increased their off-balance-sheet activities to avoid competition from nonbank banks. 
A) banks increased their off-balance-sheet activities to avoid regulatory taxes. 
B) banks decreased their off-balance-sheet activities to avoid regulatory costs. 
C) banks decreased their off-balance-sheet activities to avoid competition from nonbank banks. 
D) banks increased their off-balance-sheet activities to avoid competition from nonbank banks. B

Question 2

Which of the following statements is true?

Accepted Answer

A) The measure used to measure the change in delta as the underlying security price varies is called vega. 
B) The measure used to measure the change in delta as the underlying security price varies is called alpha. 
C) The measure used to measure the change in delta as the underlying security price varies is called beta. 
D) None of the listed options are correct. 
A) The measure used to measure the change in delta as the underlying security price varies is called vega. 
B) The measure used to measure the change in delta as the underlying security price varies is called alpha. 
C) The measure used to measure the change in delta as the underlying security price varies is called beta. 
D) None of the listed options are correct. D

Question 3

Off-balance-sheet items are:

Accepted Answer

A) items omitted from the short form balance sheet. 
B) contingent assets and liabilities. 
C) exceptionally risky assets and liabilities. 
D) foreign (off shore) assets and liabilities. 
A) items omitted from the short form balance sheet. 
B) contingent assets and liabilities. 
C) exceptionally risky assets and liabilities. 
D) foreign (off shore) assets and liabilities. B

Question 4

Which of the following statements is true?

Accepted Answer

A) The delta of an option can be calculated as the option's price divided by the price of the underlying security. 
B) The delta of an option can be calculated as the change in the option's price divided by the change in the price of the underlying security. 
C) The delta of an option can be calculated as the price of the underlying security divided by the price of the option. 
D) The delta of an option can be calculated as the change in the price of the underlying security divided by the change in the price of the option. 
A) The delta of an option can be calculated as the option's price divided by the price of the underlying security. 
B) The delta of an option can be calculated as the change in the option's price divided by the change in the price of the underlying security. 
C) The delta of an option can be calculated as the price of the underlying security divided by the price of the option. 
D) The delta of an option can be calculated as the change in the price of the underlying security divided by the change in the price of the option.

Question 5

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 6

Which of the following statements is true?

Accepted Answer

A) The variable spread between a lending rate and a borrowing rate, or between any two interest rates or prices is called basis risk. 
B) The variable spread between a lending rate and a borrowing rate, or between any two interest rates or prices is called spread risk. 
C) The variable spread between a lending rate and a borrowing rate, or between any two interest rates or prices is called interest spread risk. 
D) The variable spread between a lending rate and a borrowing rate, or between any two interest rates or prices is called funding risk. 
A) The variable spread between a lending rate and a borrowing rate, or between any two interest rates or prices is called basis risk. 
B) The variable spread between a lending rate and a borrowing rate, or between any two interest rates or prices is called spread risk. 
C) The variable spread between a lending rate and a borrowing rate, or between any two interest rates or prices is called interest spread risk. 
D) The variable spread between a lending rate and a borrowing rate, or between any two interest rates or prices is called funding risk.

Question 7

Redraw facilities are included in the category 'commitments and other non-market related items'.

Accepted Answer

A) True 
 B)False

Question 8

What is seen as a possible reason behind restricted supply of spot loans to borrowers during a credit crunch?

Accepted Answer

A) Expansionary monetary policy actions of the Reserve Bank of Australia. 
B) FI's increased aversion toward lending during tight monetary conditions. 
C) Low aggregate demand from borrowers to take down loan commitments. 
D) Decrease in cost of funds. 
A) Expansionary monetary policy actions of the Reserve Bank of Australia. 
B) FI's increased aversion toward lending during tight monetary conditions. 
C) Low aggregate demand from borrowers to take down loan commitments. 
D) Decrease in cost of funds.

Question 9

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.

Question 10

Which of the following statements is true?

Accepted Answer

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

Question 11

Standby letters of credit can be seen as direct competitors to loan commitments.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements is true?

Accepted Answer

A) In its simplest form, the traditional valuation calculates an FI's net worth as the market value of assets less the market value of liabilities. 
B) In its simplest form, traditional valuation calculates an FI's net worth as the market value of assets plus the market value of liabilities. 
C) In its simplest form, traditional valuation calculates an FI's net worth as the market value of liabilities less the market value of assets. 
D) None of the listed options are correct. 
A) In its simplest form, the traditional valuation calculates an FI's net worth as the market value of assets less the market value of liabilities. 
B) In its simplest form, traditional valuation calculates an FI's net worth as the market value of assets plus the market value of liabilities. 
C) In its simplest form, traditional valuation calculates an FI's net worth as the market value of liabilities less the market value of assets. 
D) None of the listed options are correct.

Question 13

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 14

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 15

Which of the following statements is true?

Accepted Answer

A) Large increases in the value of the OBS assets can render an FI economically insolvent. 
B) Large increases in the value of the OBS liabilities will not render an FI economically insolvent as the liabilities are only contingent. 
C) Large increases in the value of the OBS liabilities will not render an FI economically insolvent as the net worth of the institution will not be affected. 
D) Large increases in the value of the OBS liabilities can render an FI economically insolvent. 
A) Large increases in the value of the OBS assets can render an FI economically insolvent. 
B) Large increases in the value of the OBS liabilities will not render an FI economically insolvent as the liabilities are only contingent. 
C) Large increases in the value of the OBS liabilities will not render an FI economically insolvent as the net worth of the institution will not be affected. 
D) Large increases in the value of the OBS liabilities can render an FI economically insolvent.

Question 16

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 17

Which of the following statements is true?

Accepted Answer

A) When issued trading can expose FIs to future interest rate risk. 
B) When issued trading can expose FIs to future credit risk. 
C) When issued trading can expose FIs to future liquidity risk. 
D) When issued trading can expose FIs to future default risk. 
A) When issued trading can expose FIs to future interest rate risk. 
B) When issued trading can expose FIs to future credit risk. 
C) When issued trading can expose FIs to future liquidity risk. 
D) When issued trading can expose FIs to future default risk.

Question 18

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 19

Which of the following statements is true?

Accepted Answer

A) In general, default risk on OTC contracts decreases with the time to maturity of the contract and the fluctuation of underlying prices, interest rates or exchange rates. 
B) In general, default risk on OTC contracts increases with the time to maturity of the contract and the fluctuation of underlying prices, interest rates or exchange rates. 
C) In general, default risk on OTC contracts is independent of the time to maturity of the contract and the fluctuation of underlying prices, interest rates or exchange rates. 
D) OTC contracts are generally free of default risk. 
A) In general, default risk on OTC contracts decreases with the time to maturity of the contract and the fluctuation of underlying prices, interest rates or exchange rates. 
B) In general, default risk on OTC contracts increases with the time to maturity of the contract and the fluctuation of underlying prices, interest rates or exchange rates. 
C) In general, default risk on OTC contracts is independent of the time to maturity of the contract and the fluctuation of underlying prices, interest rates or exchange rates. 
D) OTC contracts are generally free of default risk.

Question 20

Which of the following situation is similar to the externality effect?

Accepted Answer

A) Exercising an adverse material change in conditions clause as a last resort, thereby cancelling or repricing a loan commitment. 
B) Increase in the cost of funds above normal levels while many FIs scramble for funds to meet their commitments to customers during a credit crunch. 
C) In a loan commitment, the borrower takes down only part of the funds over the specified time-period. 
D) The buyer of a commercial letter of credit fails to perform as promised under a contractual obligation. 
A) Exercising an adverse material change in conditions clause as a last resort, thereby cancelling or repricing a loan commitment. 
B) Increase in the cost of funds above normal levels while many FIs scramble for funds to meet their commitments to customers during a credit crunch. 
C) In a loan commitment, the borrower takes down only part of the funds over the specified time-period. 
D) The buyer of a commercial letter of credit fails to perform as promised under a contractual obligation.

In the early 1980s:

Which of the following statements is true?

Off-balance-sheet items are:

Which of the following statements is true?

An exporter demands a letter of credit in order to:

Which of the following statements is true?

Redraw facilities are included in the category 'commitments and other non-market related items'.

What is seen as a possible reason behind restricted supply of spot loans to borrowers during a credit crunch?

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?

Which of the following statements is true?

Standby letters of credit can be seen as direct competitors to loan commitments.

Which of the following statements is true?

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

Which of the following statements is true?

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.

Which of the following statements is true?

How do you interpret a delta of 0.30?

Which of the following statements is true?

Which of the following situation is similar to the externality effect?

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

In the early 1980s:

Which of the following statements is true?

Off-balance-sheet items are:

Which of the following statements is true?

An exporter demands a letter of credit in order to:

Which of the following statements is true?

Redraw facilities are included in the category 'commitments and other non-market related items'.

What is seen as a possible reason behind restricted supply of spot loans to borrowers during a credit crunch?

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?

Which of the following statements is true?

Standby letters of credit can be seen as direct competitors to loan commitments.

Which of the following statements is true?

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

Which of the following statements is true?

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.

Which of the following statements is true?

How do you interpret a delta of 0.30?

Which of the following statements is true?

Which of the following situation is similar to the externality effect?

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