Question 1

The Black model's accuracy in pricing interest rate options is greatest when the options have short maturities.

Accepted Answer

A) True 
 B)False

Question 2

A long interest rate cap is an appropriate strategy for a party that lends money.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following best describes an interest rate cap?

Accepted Answer

A)  a cash-and-carry hedge 
B)  a series of forward contracts 
C)  a series of interest rate calls 
D)  a call option spread 
E)  none of the above 
A)  a cash-and-carry hedge 
B)  a series of forward contracts 
C)  a series of interest rate calls 
D)  a call option spread 
E)  none of the above

Question 4

Find the fixed rate on a forward swap expiring in 90 days in which the underlying swap has a maturity of 180 days and makes payments every 90 days. The prices of zero coupon bonds are 0.9877 (90 days), 0.9732 (180 days), and 0.9597 (270 days).

Accepted Answer

A)  5.97 percent 
B)  5.6 percent 
C)  5.5 percent 
D)  5.78 percent 
E)  5 percent 
A)  5.97 percent 
B)  5.6 percent 
C)  5.5 percent 
D)  5.78 percent 
E)  5 percent

Question 5

An off-market FRA is one constructed outside of the over-the-counter market.

Accepted Answer

A) True 
 B)False

Question 6

The payoff of a long interest rate floor is equivalent to the payoff of a short receiver swaption.

Accepted Answer

A) True 
 B)False

Question 7

When valuing an interest rate call option, one approach is to use the Black call option price adjusted for the present value

Accepted Answer

A)  over the m days of the underlying option using the continuously compounded forward rate. 
B)  over the m days of the underlying rate using the continuously compounded spot rate. 
C)  over the days remaining of the option using the continuously compounded forward rate. 
D)  over the days remaining of the option using the continuously compounded spot rate. 
E)  over the m days of the underlying rate using the continuously compounded forward rate. 
A)  over the m days of the underlying option using the continuously compounded forward rate. 
B)  over the m days of the underlying rate using the continuously compounded spot rate. 
C)  over the days remaining of the option using the continuously compounded forward rate. 
D)  over the days remaining of the option using the continuously compounded spot rate. 
E)  over the m days of the underlying rate using the continuously compounded forward rate.

Question 8

A short FRA would be appropriate for a party anticipating an increase in interest rates.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is a 1 x 4 FRA?

Accepted Answer

A)  The FRA expires in one month, and the underlying Eurodollar expires in three months. 
B)  The FRA expires in four months, and the underlying Eurodollar expires in one month. 
C)  The FRA expires in one month, and the underlying Eurodollar expires in four months. 
D)  The FRA expires in three months, and the underlying Eurodollar expires in four months. 
E)  The FRA expires in one month, and the underlying Eurodollar expires in five months. 
A)  The FRA expires in one month, and the underlying Eurodollar expires in three months. 
B)  The FRA expires in four months, and the underlying Eurodollar expires in one month. 
C)  The FRA expires in one month, and the underlying Eurodollar expires in four months. 
D)  The FRA expires in three months, and the underlying Eurodollar expires in four months. 
E)  The FRA expires in one month, and the underlying Eurodollar expires in five months.

Question 10

Interest rate caps are equivalent to a series of interest rate call options.

Accepted Answer

A) True 
 B)False

Question 11

Swaptions are like forward swaps in which of the following ways

Accepted Answer

A)  Both are free of credit risk 
B)  Both require the execution of a swap at expiration 
C)  They have the same price 
D)  Both are traded on swaption exchanges 
E)  none of the above 
A)  Both are free of credit risk 
B)  Both require the execution of a swap at expiration 
C)  They have the same price 
D)  Both are traded on swaption exchanges 
E)  none of the above

Question 12

The convention for calculating interest on an interest rate derivative is to multiply the notional amount times the payoff function times 90 over 360 or 365.

Accepted Answer

A) True 
 B)False

Question 13

Pricing an interest rate option is a complex process, but a simple approach can be taken by applying the Cox model in this context.

Accepted Answer

A) True 
 B)False

Question 14

When pricing interest rates in the Black model, the underlying is the forward rate.

Accepted Answer

A) True 
 B)False

Question 15

Payer swaptions can be used to hedge put features on bonds.

Accepted Answer

A) True 
 B)False

Question 16

An FRA is similar to any type of forward contract, but the payoff is based on an interest rate, rather than the price of an asset.

Accepted Answer

A) True 
 B)False

Question 17

Find the payoff of an interest rate call option on the annual rate with an exercise rate of 10 percent if the one-period rate at expiration is 11 percent. (No days/360 adjustment is necessary and assume a $1 notional amount.)

Accepted Answer

A)  0.12 
B)  zero 
C)  0.01 
D)  0.0090 
E)  none of the above 
A)  0.12 
B)  zero 
C)  0.01 
D)  0.0090 
E)  none of the above

Question 18

Find the approximate market value of a long position in an FRA at a fixed rate of 5 percent in which the contract expires in 20 days, the underlying is 180-day LIBOR, the notional amount is $25 million, the 20-day rate is 7 percent, and the 200-day rate is 8.5 percent.

Accepted Answer

A)  $433,658 
B)  -$454,954 
C)  $322,819 
D)  -$322,819 
E)  $454,954 
A)  $433,658 
B)  -$454,954 
C)  $322,819 
D)  -$322,819 
E)  $454,954

Question 19

The advantage of a collar over a cap is

Accepted Answer

A)  it lowers the out-of-pocket cost 
B)  it offers the possibility of greater returns 
C)  it eliminates the risk 
D)  it has lower transaction costs 
E)  none of the above 
A)  it lowers the out-of-pocket cost 
B)  it offers the possibility of greater returns 
C)  it eliminates the risk 
D)  it has lower transaction costs 
E)  none of the above

Question 20

An FRA differs from an interest rate swap in which of the following ways?

Accepted Answer

A)  An FRA has more credit risk 
B)  FRAs are federally regulated 
C)  Traditionally the payment in an FRA is delayed 
D)  FRAs are used only by banks and swaps are used only by corporations 
E)  none of the above 
A)  An FRA has more credit risk 
B)  FRAs are federally regulated 
C)  Traditionally the payment in an FRA is delayed 
D)  FRAs are used only by banks and swaps are used only by corporations 
E)  none of the above

The Black model's accuracy in pricing interest rate options is greatest when the options have short maturities.

A long interest rate cap is an appropriate strategy for a party that lends money.

Which of the following best describes an interest rate cap?

Find the fixed rate on a forward swap expiring in 90 days in which the underlying swap has a maturity of 180 days and makes payments every 90 days. The prices of zero coupon bonds are 0.9877 (90 days), 0.9732 (180 days), and 0.9597 (270 days).

An off-market FRA is one constructed outside of the over-the-counter market.

The payoff of a long interest rate floor is equivalent to the payoff of a short receiver swaption.

When valuing an interest rate call option, one approach is to use the Black call option price adjusted for the present value

A short FRA would be appropriate for a party anticipating an increase in interest rates.

Which of the following is a 1 x 4 FRA?

Interest rate caps are equivalent to a series of interest rate call options.

Swaptions are like forward swaps in which of the following ways

The convention for calculating interest on an interest rate derivative is to multiply the notional amount times the payoff function times 90 over 360 or 365.

Pricing an interest rate option is a complex process, but a simple approach can be taken by applying the Cox model in this context.

When pricing interest rates in the Black model, the underlying is the forward rate.

Payer swaptions can be used to hedge put features on bonds.

An FRA is similar to any type of forward contract, but the payoff is based on an interest rate, rather than the price of an asset.

Find the payoff of an interest rate call option on the annual rate with an exercise rate of 10 percent if the one-period rate at expiration is 11 percent. (No days/360 adjustment is necessary and assume a $1 notional amount.)

Find the approximate market value of a long position in an FRA at a fixed rate of 5 percent in which the contract expires in 20 days, the underlying is 180-day LIBOR, the notional amount is $25 million, the 20-day rate is 7 percent, and the 200-day rate is 8.5 percent.

The advantage of a collar over a cap is

An FRA differs from an interest rate swap in which of the following ways?

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: The Binomial Model

Option Pricing Models: The Black-Scholes-Merton Model

Basic Option Strategies

Advanced Option Strategies

Structure of Forward and Futures Markets

Principles of Pricing Forwards, Futures and Options on Futures

Futures Arbitrage Strategies

Forward and Futures Hedging, Spread, and Target Strategies

Swaps

Advanced Derivatives and Strategies

Financial Risk Management Techniques and Appplications

Managing Risk in an Organization

Filters

Exam 13: Interest Rate Forwards and Options

The Black model's accuracy in pricing interest rate options is greatest when the options have short maturities.

A long interest rate cap is an appropriate strategy for a party that lends money.

Which of the following best describes an interest rate cap?

Find the fixed rate on a forward swap expiring in 90 days in which the underlying swap has a maturity of 180 days and makes payments every 90 days. The prices of zero coupon bonds are 0.9877 (90 days), 0.9732 (180 days), and 0.9597 (270 days).

An off-market FRA is one constructed outside of the over-the-counter market.

The payoff of a long interest rate floor is equivalent to the payoff of a short receiver swaption.

When valuing an interest rate call option, one approach is to use the Black call option price adjusted for the present value

A short FRA would be appropriate for a party anticipating an increase in interest rates.

Which of the following is a 1 x 4 FRA?

Interest rate caps are equivalent to a series of interest rate call options.

Swaptions are like forward swaps in which of the following ways

The convention for calculating interest on an interest rate derivative is to multiply the notional amount times the payoff function times 90 over 360 or 365.

Pricing an interest rate option is a complex process, but a simple approach can be taken by applying the Cox model in this context.

When pricing interest rates in the Black model, the underlying is the forward rate.

Payer swaptions can be used to hedge put features on bonds.

An FRA is similar to any type of forward contract, but the payoff is based on an interest rate, rather than the price of an asset.

Find the payoff of an interest rate call option on the annual rate with an exercise rate of 10 percent if the one-period rate at expiration is 11 percent. (No days/360 adjustment is necessary and assume a $1 notional amount.)

Find the approximate market value of a long position in an FRA at a fixed rate of 5 percent in which the contract expires in 20 days, the underlying is 180-day LIBOR, the notional amount is $25 million, the 20-day rate is 7 percent, and the 200-day rate is 8.5 percent.

The advantage of a collar over a cap is

An FRA differs from an interest rate swap in which of the following ways?

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: The Binomial Model

Option Pricing Models: The Black-Scholes-Merton Model

Basic Option Strategies

Advanced Option Strategies

Structure of Forward and Futures Markets

Principles of Pricing Forwards, Futures and Options on Futures

Futures Arbitrage Strategies

Forward and Futures Hedging, Spread, and Target Strategies

Swaps

Advanced Derivatives and Strategies

Financial Risk Management Techniques and Appplications

Managing Risk in an Organization

Filters