Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

Payer swaptions can be used to convert callable to non-callable debt.

Accepted Answer

A) True 
 B)False

Question 3

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 4

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 5

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 6

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 principal 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 7

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

Accepted Answer

A) True 
 B)False

Question 8

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

Question 9

A bank buys an interest rate floor in conjunction with a loan it holds that will make four semiannual payments starting six months from now.The floor has a strike of 9 percent.LIBOR at the beginning of the four payment periods is 10,11,8,and 8.6 percent.On which dates will the floor writer make a payment to the bank?

Accepted Answer

A) now and in 24 months 
B) in 18 and 24 months 
C) in 12 and 18 months 
D) in 6,12,18 and 24 months 
E) none of the above 
A) now and in 24 months 
B) in 18 and 24 months 
C) in 12 and 18 months 
D) in 6,12,18 and 24 months 
E) none of the above

Question 10

Determine the value of an interest rate call option at the maturity of a loan if the call has a strike of 12 percent,a face value of $50 million,the loan matures 90 days after the call is exercised,the call expires in 60 days,the call premium is $200,000,and LIBOR ends up at 13 percent.

Accepted Answer

A) $125,000 
B) $83,333 
C) $208,000 
D) -$75,000 
E) none of the above 
A) $125,000 
B) $83,333 
C) $208,000 
D) -$75,000 
E) none of the above

Question 11

In a 12 x 18 FRA,the derivative expires in one year and the underlying matures in 18 months.

Accepted Answer

A) True 
 B)False

Question 12

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 13

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

Accepted Answer

A) True 
 B)False

Question 14

If a lender uses a collar,the transactions would be

Accepted Answer

A) buy a floor at one exercise price,sell a floor at another exercise price 
B) buy a floor,sell a cap 
C) sell a floor,buy a cap 
D) buy a cap at one exercise price,sell a floor at another exercise price 
E) buy a cap and sell a floor at the same exercise price 
A) buy a floor at one exercise price,sell a floor at another exercise price 
B) buy a floor,sell a cap 
C) sell a floor,buy a cap 
D) buy a cap at one exercise price,sell a floor at another exercise price 
E) buy a cap and sell a floor at the same exercise price

Question 15

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 16

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 principal 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 17

The appropriate fixed rate on an FRA is the forward rate in the term structure.

Accepted Answer

A) True 
 B)False

Question 18

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 19

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 20

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

Accepted Answer

A) True 
 B)False

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

Payer swaptions can be used to convert callable to non-callable debt.

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).

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

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

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 principal is $30 million.

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

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

Determine the value of an interest rate call option at the maturity of a loan if the call has a strike of 12 percent,a face value of $50 million,the loan matures 90 days after the call is exercised,the call expires in 60 days,the call premium is $200,000,and LIBOR ends up at 13 percent.

In a 12 x 18 FRA,the derivative expires in one year and the underlying matures in 18 months.

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

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

If a lender uses a collar,the transactions would be

Which of the following is a 1 x 4 FRA?

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 principal is $25 million,the 20-day rate is 7 percent,and the 200-day rate is 8.5 percent.

The appropriate fixed rate on an FRA is the forward rate in the term structure.

Swaptions are like forward swaps in which of the following ways

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

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

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

Filters

Exam 13: Interest Rate Forwards and Options

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

Payer swaptions can be used to convert callable to non-callable debt.

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).

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

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

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 principal is $30 million.

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

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

Determine the value of an interest rate call option at the maturity of a loan if the call has a strike of 12 percent,a face value of $50 million,the loan matures 90 days after the call is exercised,the call expires in 60 days,the call premium is $200,000,and LIBOR ends up at 13 percent.

In a 12 x 18 FRA,the derivative expires in one year and the underlying matures in 18 months.

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

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

If a lender uses a collar,the transactions would be

Which of the following is a 1 x 4 FRA?

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 principal is $25 million,the 20-day rate is 7 percent,and the 200-day rate is 8.5 percent.

The appropriate fixed rate on an FRA is the forward rate in the term structure.

Swaptions are like forward swaps in which of the following ways

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

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

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

Filters