Exam 13: Interest Rate Forwards and Options

A bank makes a $5 million 180-day pure discount loan at LIBOR of 9 percent.At the same time,however,it exercises an interest rate put that has a strike of 11 percent.Find the annualized rate of return on the loan.Ignore the cost of the put.

Free

(Multiple Choice)

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Question 1

Correct Answer:

Verified

Receiver swaptions allow a firm to receive a floating rate.

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(True/False)

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Question 2

Correct Answer:

Verified

False

A long cap and a long floor with the exercise price set at the swap rate is equivalent to a swap.

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(True/False)

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Question 3

Correct Answer:

Verified

False

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

(True/False)

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Question 4

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

(True/False)

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Question 5

Find the rate on a pure discount loan hedged with a long FRA if the loan is for $10 million and matures in 30 days,the FRA is 30-day LIBOR,the fixed rate on the FRA is 4 percent,and LIBOR at the time the loan is taken out is 5 percent.

(Multiple Choice)

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Question 6

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 principal. )

(Multiple Choice)

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Question 7

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

(True/False)

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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.

(True/False)

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Question 9

In a zero cost collar,the exercise price on the floor is set such that the floor premium more than offsets the cap premium.

(True/False)

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Question 10

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

(True/False)

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Question 11

Which of the following strategies replicates a long position in an FRA?

(Multiple Choice)

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Question 12

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

(True/False)

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Question 13

An FRA is most like which of the following transactions

(Multiple Choice)

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Question 14

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

(True/False)

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Question 15

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

(True/False)

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Question 16

The advantage of a collar over a cap is

(Multiple Choice)

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Question 17

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

(True/False)

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Question 18

FRA payoffs are discounted by the current interest rate.

(True/False)

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Question 19

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

(True/False)

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Question 20

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A bank makes a $5 million 180-day pure discount loan at LIBOR of 9 percent.At the same time,however,it exercises an interest rate put that has a strike of 11 percent.Find the annualized rate of return on the loan.Ignore the cost of the put.

Receiver swaptions allow a firm to receive a floating rate.

A long cap and a long floor with the exercise price set at the swap rate is equivalent to a swap.

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

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

Find the rate on a pure discount loan hedged with a long FRA if the loan is for $10 million and matures in 30 days,the FRA is 30-day LIBOR,the fixed rate on the FRA is 4 percent,and LIBOR at the time the loan is taken out is 5 percent.

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 principal. )

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

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.

In a zero cost collar,the exercise price on the floor is set such that the floor premium more than offsets the cap premium.

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

Which of the following strategies replicates a long position in an FRA?

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

An FRA is most like which of the following transactions

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

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

The advantage of a collar over a cap is

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

FRA payoffs are discounted by the current interest rate.

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

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

The 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 Applications

Managing Risk in an Organization

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