Question 1

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 2

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 3

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 4

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

Accepted Answer

A) True 
 B)False

Question 5

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 6

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 7

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 8

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 9

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 10

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 11

For firms that may need to enter into a swap in the future,a forward swap serves as well as a swaption.

Accepted Answer

A) True 
 B)False

Question 12

A long position in an interest rate call would be appropriate for which of the following situations:

Accepted Answer

A) a bond trader expects falling interest rates 
B) a party holding a short position in Eurodollar futures is concerned about losing money 
C) a borrower expects rising interest rates 
D) a lender expects rising interest rates 
E) a derivatives dealer is exposed to the risk of falling interest rates 
A) a bond trader expects falling interest rates 
B) a party holding a short position in Eurodollar futures is concerned about losing money 
C) a borrower expects rising interest rates 
D) a lender expects rising interest rates 
E) a derivatives dealer is exposed to the risk of falling interest rates

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

FRA payoffs are discounted by the current interest rate.

Accepted Answer

A) True 
 B)False

Question 15

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 16

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 17

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 18

The value of an FRA is obtained by determining the value of a strategy of long a long-term underlying time deposit and short a short-term underlying time deposit.

Accepted Answer

A) True 
 B)False

Question 19

Suppose you have a floating rate loan tied to 90-day LIBOR and have hedged the interest rate risk with an interest rate cap.The effective annual rate actually paid on the loan with the cap is found using a methodology equivalent to

Accepted Answer

A) computing the Black-Scholes-Merton option call price 
B) computing the net present value 
C) computing the internal rate of return 
D) computing the Black commodity option call price 
E) computing the WACC 
A) computing the Black-Scholes-Merton option call price 
B) computing the net present value 
C) computing the internal rate of return 
D) computing the Black commodity option call price 
E) computing the WACC

Question 20

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

Accepted Answer

A) True 
 B)False

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.

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.

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

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

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.

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

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

If a lender uses a collar,the transactions would be

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

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

For firms that may need to enter into a swap in the future,a forward swap serves as well as a swaption.

A long position in an interest rate call would be appropriate for which of the following situations:

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

FRA payoffs are discounted by the current interest rate.

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

All of the following are uses of swaptions except

The advantage of a collar over a cap is

The value of an FRA is obtained by determining the value of a strategy of long a long-term underlying time deposit and short a short-term underlying time deposit.

Suppose you have a floating rate loan tied to 90-day LIBOR and have hedged the interest rate risk with an interest rate cap.The effective annual rate actually paid on the loan with the cap is found using a methodology equivalent to

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

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

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.

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.

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

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

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.

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

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

If a lender uses a collar,the transactions would be

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

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

For firms that may need to enter into a swap in the future,a forward swap serves as well as a swaption.

A long position in an interest rate call would be appropriate for which of the following situations:

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

FRA payoffs are discounted by the current interest rate.

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

All of the following are uses of swaptions except

The advantage of a collar over a cap is

The value of an FRA is obtained by determining the value of a strategy of long a long-term underlying time deposit and short a short-term underlying time deposit.

Suppose you have a floating rate loan tied to 90-day LIBOR and have hedged the interest rate risk with an interest rate cap.The effective annual rate actually paid on the loan with the cap is found using a methodology equivalent to

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

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