Question 1

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

Accepted Answer

A) True 
 B)False  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 D

Question 3

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 C

Question 4

The fixed rate on an FRA expiring in 30 days on 180-day LIBOR with the 30-day rate being 5 percent and the 210 day rate being 6 percent is

Accepted Answer

A) 6 percent 
B) 6.14 percent 
C) 5 percent 
D) 5.5 percent 
E) 5.15 percent 
A) 6 percent 
B) 6.14 percent 
C) 5 percent 
D) 5.5 percent 
E) 5.15 percent

Question 5

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 6

FRAs,caps and floors are guaranteed against default.

Accepted Answer

A) True 
 B)False

Question 7

An interest rate floor is a combination of interest rate puts designed to protect a lender in a floating-rate loan against interest rate increases.

Accepted Answer

A) True 
 B)False

Question 8

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

Accepted Answer

A) True 
 B)False

Question 9

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 10

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

Accepted Answer

A) True 
 B)False

Question 11

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 12

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.

Accepted Answer

A) 4.87 percent 
B) 0.25 percent 
C) 5.18 percent 
D) 4.13 percent 
E) 2.04 percent 
A) 4.87 percent 
B) 0.25 percent 
C) 5.18 percent 
D) 4.13 percent 
E) 2.04 percent

Question 13

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 14

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 15

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

Accepted Answer

A) True 
 B)False

Question 16

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 17

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 18

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

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

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

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

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.

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.

The fixed rate on an FRA expiring in 30 days on 180-day LIBOR with the 30-day rate being 5 percent and the 210 day rate being 6 percent is

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

FRAs,caps and floors are guaranteed against default.

An interest rate floor is a combination of interest rate puts designed to protect a lender in a floating-rate loan against interest rate increases.

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

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

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

Which of the following is a 1 x 4 FRA?

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 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.

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).

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

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

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.

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

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

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

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 12: Interest Rate Forwards and Options

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

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.

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.

The fixed rate on an FRA expiring in 30 days on 180-day LIBOR with the 30-day rate being 5 percent and the 210 day rate being 6 percent is

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

FRAs,caps and floors are guaranteed against default.

An interest rate floor is a combination of interest rate puts designed to protect a lender in a floating-rate loan against interest rate increases.

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

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

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

Which of the following is a 1 x 4 FRA?

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 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.

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).

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

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

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.

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

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

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

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