Question 1

Letters of credit are:

Accepted Answer

A) contingent guarantees sold by an FI to underwrite the trade or commercial performance of the buyer of the guarantee. 
B) another word for cheques. 
C) guarantees bought by an FI because they are convinced by the issuer's commercial performance. 
D) reminders sent by FIs to customers who have outstanding debit balances.

Question 2

As compared to LCs, SLCs typically are used to cover contingencies that potentially are more severe and which may not be trade related.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements is true?

Accepted Answer

A) In general, the relationship between the value of an option and the underlying value of a security is non-linear. 
B) For an out-of-the money call option the price of the underlying security is less than the option's exercise price. 
C) Using the delta method to derive the market value of an option is at best an approximation and to deal with the non-linearity of option pay-offs, some analysts consider an option's gamma too. 
D) All of the listed options are correct.

Question 4

Which of the following is an out-of-the-money counterparty?

Accepted Answer

A) Counterparty in a loan commitment contract. 
B) FI that trades in securities prior to their actual issue. 
C) Counterparty that is currently at an advantage in terms of cash flows. 
D) Counterparty that is currently at a disadvantage in terms of cash flows

Question 5

Assume that the market value of assets is $120 and the market value of liabilities is $90.What is the bank's net worth?

Accepted Answer

A) $210 
B) $30 
C) -$30 
D) None of the listed options are correct.

Exam 16: Off-Balance-Sheet Activities

Letters of credit are:

As compared to LCs, SLCs typically are used to cover contingencies that potentially are more severe and which may not be trade related.

Which of the following statements is true?

Which of the following is an out-of-the-money counterparty?

Assume that the market value of assets is $120 and the market value of liabilities is $90.What is the bank's net worth?