Question 1

Buying an interest rate call results in a limited loss if interest rates fall.

Accepted Answer

A) True 
 B)False

Question 2

A payer swaption is expiring. The underlying swap has a two year maturity. Th e present value factors are 0.9259 (one year) and 0.8651 (two years). The strike rate is 7 percent. What is the value of the swaption per $1 notional amount.

Accepted Answer

A)  0.0000, since it is out-of-the-money 
B)  1.0000 
C)  0.0753 
D)  0.0095 
E)  none of the above 
A)  0.0000, since it is out-of-the-money 
B)  1.0000 
C)  0.0753 
D)  0.0095 
E)  none of the above

Question 3

A payer swaption is equivalent to which of the following instruments.

Accepted Answer

A)  a call option on a bond 
B)  a long Treasury bond futures option 
C)  a long Eurodollar futures 
D)  an interest rate cap 
E)  a put option on a bond 
A)  a call option on a bond 
B)  a long Treasury bond futures option 
C)  a long Eurodollar futures 
D)  an interest rate cap 
E)  a put option on a bond

Question 4

In an FRA on an m-day rate, payment is made when the interest rate is determined rather than m days later.

Accepted Answer

A) True 
 B)False

Question 5

An interest rate collar is the purchase of a cap and a floor.

Accepted Answer

A) True 
 B)False

Question 6

An interest rate put option gives the holder the right to make an interest payment at a floating rate and receive an interest payment at a fixed rate.

Accepted Answer

A) True 
 B)False

Question 7

All of the following are uses of swaptions except

Accepted Answer

A)  to speculate on interest rates 
B)  to give a firm flexibility in future borrowings 
C)  to borrow money 
D)  to create callable from non-callable bonds 
E)  none of the above 
A)  to speculate on interest rates 
B)  to give a firm flexibility in future borrowings 
C)  to borrow money 
D)  to create callable from non-callable bonds 
E)  none of the above

Question 8

The pricing of a forward swap is done in the same manner as pricing a spot started today, except that forward rates are used instead of spot rates.

Accepted Answer

A) True 
 B)False

Question 9

FRA payoffs are discounted by the current interest rate.

Accepted Answer

A) True 
 B)False

Question 10

Which of the following is a limitation of using the Black model to price interest rate options?

Accepted Answer

A)  the risk-free rate is not constant 
B)  the volatility is not constant 
C)  interest rates are not lognormally distributed 
D)  all of the above 
E)  none of the above 
A)  the risk-free rate is not constant 
B)  the volatility is not constant 
C)  interest rates are not lognormally distributed 
D)  all of the above 
E)  none of the above

Question 11

Pricing an interest rate cap is done by pricing the component caplets and adding up their values.

Accepted Answer

A) True 
 B)False

Question 12

An interest rate payer swaption is more like an interest rate put than an interest rate call.

Accepted Answer

A) True 
 B)False

Question 13

FRAs, caps and floors are guaranteed against default.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following is not required to determine a swaption payoff at expiration?

Accepted Answer

A)  the exercise rate 
B)  the term structure of zero coupon rates at the swaption expiration 
C)  the maturity of the underlying swap 
D)  the yield on a bond of equivalent maturity as the swap 
E)  none of the above 
A)  the exercise rate 
B)  the term structure of zero coupon rates at the swaption expiration 
C)  the maturity of the underlying swap 
D)  the yield on a bond of equivalent maturity as the swap 
E)  none of the above

Question 15

If interest rates increase, the holder of a long FRA benefits.

Accepted Answer

A) True 
 B)False

Question 16

Find the premium of a correctly priced interest rate call on 30-day LIBOR if the current forward rate is 7 percent, the strike is 7 percent, the continuously compounded risk-free rate is 6.2 percent, the volatility is 12 percent and the option expires in one year. The notional amount is $30 million.

Accepted Answer

A)  $.0031 
B)  $93,000 
C)  $7,817 
D)  $0.0012 
E)  $36,000 
A)  $.0031 
B)  $93,000 
C)  $7,817 
D)  $0.0012 
E)  $36,000

Question 17

An FRA in which the rate is not set according to rates in the market is called

Accepted Answer

A)  a short FRA 
B)  a long FRA 
C)  an off-market FRA 
D)  a hedged FRA 
E)  an FRA spread 
A)  a short FRA 
B)  a long FRA 
C)  an off-market FRA 
D)  a hedged FRA 
E)  an FRA spread

Question 18

Suppose your firm invested in a callable bond recently when interest rates were high and the bond has three more years to go before the first call date. If interest rates are expected to fall over the next three years, which of the following is one potential strategy would take advantage of this view.

Accepted Answer

A)  buy a payer swaption 
B)  sell a payer swaption 
C)  buy a receiver swaption* 
D)  sell a receiver swaption 
E)  buy an interest rate floor 
A)  buy a payer swaption 
B)  sell a payer swaption 
C)  buy a receiver swaption* 
D)  sell a receiver swaption 
E)  buy an interest rate floor

Question 19

Which of the following best describes a zero cost collar within the context of interest rate derivatives?

Accepted Answer

A)  A zero cost collar is a long (short) position in an interest rate cap and a short (long) position in an interest rate floor where the cost of the cap (floor) exactly offsets the revenue from the floor (cap).* 
B)  A zero cost collar is a long (short) position in an interest rate cap and a short (long) position in an interest rate floor where the cost of the cap (floor) is less than the revenue from the floor (cap). 
C)  A zero cost collar is a long (short) position in an interest rate cap and a short (long) position in an interest rate floor where the cost of the cap (floor) is greater than the revenue from the floor (cap). 
D)  A zero cost collar is an option that pays off only if interest rates remain within a designated range. 
E)  A zero cost collar is an option that pays off only if interest rates fall outside of a designated range. 
A)  A zero cost collar is a long (short) position in an interest rate cap and a short (long) position in an interest rate floor where the cost of the cap (floor) exactly offsets the revenue from the floor (cap).* 
B)  A zero cost collar is a long (short) position in an interest rate cap and a short (long) position in an interest rate floor where the cost of the cap (floor) is less than the revenue from the floor (cap). 
C)  A zero cost collar is a long (short) position in an interest rate cap and a short (long) position in an interest rate floor where the cost of the cap (floor) is greater than the revenue from the floor (cap). 
D)  A zero cost collar is an option that pays off only if interest rates remain within a designated range. 
E)  A zero cost collar is an option that pays off only if interest rates fall outside of a designated range.

Question 20

An FRA is most like which of the following transactions

Accepted Answer

A)  an interest rate cap 
B)  an interest rate floor 
C)  an interest rate collar 
D)  a forward contract 
E)  none of the above 
A)  an interest rate cap 
B)  an interest rate floor 
C)  an interest rate collar 
D)  a forward contract 
E)  none of the above

Buying an interest rate call results in a limited loss if interest rates fall.

A payer swaption is expiring. The underlying swap has a two year maturity. Th e present value factors are 0.9259 (one year) and 0.8651 (two years). The strike rate is 7 percent. What is the value of the swaption per $1 notional amount.

A payer swaption is equivalent to which of the following instruments.

In an FRA on an m-day rate, payment is made when the interest rate is determined rather than m days later.

An interest rate collar is the purchase of a cap and a floor.

An interest rate put option gives the holder the right to make an interest payment at a floating rate and receive an interest payment at a fixed rate.

All of the following are uses of swaptions except

The pricing of a forward swap is done in the same manner as pricing a spot started today, except that forward rates are used instead of spot rates.

FRA payoffs are discounted by the current interest rate.

Which of the following is a limitation of using the Black model to price interest rate options?

Pricing an interest rate cap is done by pricing the component caplets and adding up their values.

An interest rate payer swaption is more like an interest rate put than an interest rate call.

FRAs, caps and floors are guaranteed against default.

Which of the following is not required to determine a swaption payoff at expiration?

If interest rates increase, the holder of a long FRA benefits.

Find the premium of a correctly priced interest rate call on 30-day LIBOR if the current forward rate is 7 percent, the strike is 7 percent, the continuously compounded risk-free rate is 6.2 percent, the volatility is 12 percent and the option expires in one year. The notional amount is $30 million.

An FRA in which the rate is not set according to rates in the market is called

Which of the following best describes a zero cost collar within the context of interest rate derivatives?

An FRA is most like which of the following transactions

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

Buying an interest rate call results in a limited loss if interest rates fall.

A payer swaption is expiring. The underlying swap has a two year maturity. Th e present value factors are 0.9259 (one year) and 0.8651 (two years). The strike rate is 7 percent. What is the value of the swaption per $1 notional amount.

A payer swaption is equivalent to which of the following instruments.

In an FRA on an m-day rate, payment is made when the interest rate is determined rather than m days later.

An interest rate collar is the purchase of a cap and a floor.

An interest rate put option gives the holder the right to make an interest payment at a floating rate and receive an interest payment at a fixed rate.

All of the following are uses of swaptions except

The pricing of a forward swap is done in the same manner as pricing a spot started today, except that forward rates are used instead of spot rates.

FRA payoffs are discounted by the current interest rate.

Which of the following is a limitation of using the Black model to price interest rate options?

Pricing an interest rate cap is done by pricing the component caplets and adding up their values.

An interest rate payer swaption is more like an interest rate put than an interest rate call.

FRAs, caps and floors are guaranteed against default.

Which of the following is not required to determine a swaption payoff at expiration?

If interest rates increase, the holder of a long FRA benefits.

An FRA in which the rate is not set according to rates in the market is called

Which of the following best describes a zero cost collar within the context of interest rate derivatives?

An FRA is most like which of the following transactions

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