Banking and Financial Institutions Practice Exam

Course Introduction

This course provides a comprehensive overview of the structure, functions, and roles of banking and financial institutions in the modern economy. Students will explore the variety of depository and non-depository institutions, including commercial banks, credit unions, investment firms, and insurance companies. Emphasis is placed on understanding how these institutions operate, the regulatory environment they navigate, risk management practices, recent innovations in the sector, and their impact on economic development. The course also covers key topics such as interest rate determination, asset-liability management, financial intermediation, and the effects of globalization on the financial system.

Recommended Textbook

Introduction to Derivatives and Risk Management 8th Edition by Don M. Chance

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16 Chapters

781 Verified Questions

781 Flashcards

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Chapter 1: Introduction

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Sample Questions

Q1) The positive relationship between risk and return is called

A)expected return

B)market efficiency

C)the law of one price

D)arbitrage

E)none of the above

Answer: E

Q2) A risk premium is the additional return investors expect for assuming risk.

A)True

B)False Answer: True

Q3) Lower transaction costs are one advantage of derivative markets.

A)True

B)False Answer: True

Q4) Derivatives permit investors to manage their risk more efficiently.

A)True

B)False Answer: True

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Chapter 2: Structure of Options Markets

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Sample Questions

Q1) Exercise limits are restrictions on the number of options that can be exercised by an investor in a given day or series of days.

A)True

B)False

Answer: True

Q2) The number of option contracts outstanding at any given time is called the open interest.

A)True

B)False

Answer: True

Q3) The bid price is the price paid to buy an option from a market maker.

A)True

B)False Answer: False

Q4) Position limits are restrictions on the number of transactions an investor can execute on a given day.

A)True

B)False Answer: False

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Chapter 3: Principles of Option Pricing

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Sample Questions

Q1) The maximum value of a call is the stock price. A)True

B)False Answer: True

Q2) Selling short a risk-free bond is equivalent to borrowing. A)True

B)False Answer: True

Q3) What is the time value of the November 110 call?

A)0.00

B)4.40

C)1.15

D)3.25

E)none of the above Answer: C

Q4) The time value of a call is greatest when the stock price is very high.

A)True

B)False Answer: False

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Chapter 4: Option Pricing Models: the Binomial Model

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Sample Questions

Q1) The binomial probabilities are probabilities if investors were risk neutral.

A)True

B)False

Q2) When the hedge ratio is adjusted in the binomial model,the transactions must be done in the option.

A)True

B)False

Q3) In the binomial model,if an option has no chance of expiring out-of-the-money,the hedge ratio will be

A)0.5

B)infinite

C)1

D)0

E)none of the above

Q4) When pricing an American put with the binomial model,you must check for early exercise at each time point and stock price except the current one.

A)True

B)False

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Page 6

Chapter 5: Option Pricing Models: the

Black-Scholes-Merton Model

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Sample Questions

Q1) The Black-Scholes-Merton option price is relatively insensitive to changes in the risk-free rate.

A)True

B)False

Q2) An option's gamma represents the risk of the delta changing.

A)True

B)False

Q3) What value does the Black-Scholes-Merton model predict for the call? (Due to differences in rounding your calculations may be slightly different."none of the above" should be selected only if your answer is different by more than 10 cents. )

A)5.35

B)1.10

C)4.73

D)6.50

E)none of the above

Q4) The volatility smile is the relationship between implied volatility and historical volatility.

A)True

B)False

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Chapter 6: Basic Option Strategies

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Sample Questions

Q1) The profit for a long put is higher for a given stock price if the put is sold back prior to expiration.

A)True

B)False

Q2) Suppose the investor constructed a covered call.At expiration the stock price is $27.What is the investor's profit?

A)$589

B)$289

C)$2,989

D)$2,711

E)none of the above

Q3) Which of the following investors may be obligated to buy stock?

A)covered call writer

B)call buyer

C)put writer

D)protective put buyer

E)none of the above

Q4) A protective put provides the same type of profit diagram as a long call. A)True

B)False

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Chapter 7: Advanced Option Strategies

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Sample Questions

Q1) A spread that is profitable if the options are in-the-money is called a money spread.

A)True

B)False

Q2) What will the straddle cost?

A)$145

B)$690

C)$971

D)$413

E)none of the above

Q3) What will be the profit if the spread is held 90 days and the stock price is $45?

A)$36

B)$20

C)$558

D)-$20

E)none of the above

Q4) A ratio spread can be conducted with money spreads or time spreads.

A)True

B)False

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Page 9

Chapter 8: The Structure of Forward and Futures Markets

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Sample Questions

Q1) If the initial margin is $5,000,the maintenance margin is $3,500 and your balance is $3,100,how much must you deposit?

A)$1,500

B)$400

C)$1,900

D)0

E)none of the above

Q2) Which of the following is the most actively traded U.S.futures contract?

A)S&P 500 Index

B)crude oil

C)Treasury bonds

D)Wheat

E)none of the above

Q3) What are circuit breakers?

A)rules that stop trading when futures are about to expire

B)a system that shuts down the exchange computer during periods of abnormal volume

C)limits on the number of contracts that can be traded on high volume days

D)rules that limit the number of contracts a speculator can hold

E)none of the above

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Chapter 9: Principles of Pricing Forwards, Futures, and Options on Futures

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Sample Questions

Q1) A synthetic put option on futures could be constructed by buying a call option on futures and selling the futures.

A)True

B)False

Q2) The daily settlement brings the value of a futures contract back to zero.

A)True

B)False

Q3) Determine the value of a European foreign currency put if the call is at $0.05,the spot rate is $0.5702,the exercise price is $0.59,the domestic interest rate is 5.75 percent,the foreign interest rate is 4.95 percent and the options expire in 45 days.

A)$0.069

B)$0.031

C)$0.050

D)$0.517

E)none of the above

Q4) The cost of carry includes the interest lost on the funds tied up in the asset stored.

A)True

B)False

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Chapter 10: Futures Arbitrage Strategies

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Sample Questions

Q1) The transaction in which money is borrowed by selling a security and promising to buy it back in several weeks is called a

A)term repo

B)overnight repo

C)term arbitrage

D)MOB spread

E)none of the above

Q2) Determine the conversion factor for delivery of the 7 1/4's off May 15,2026 on the March 2010 T-bond futures contract.

A)1.225

B)0.932

C)1.083

D)1.127

E)1.509

Q3) The coupon assumption for the conversion factor is 8 percent.

A)True

B)False

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Page 12

Chapter 11: Forward and Futures Hedging, Spread, and Target Strategies

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Sample Questions

Q1) The liquidity of the futures contract used in a hedge is very important to the hedger.

A)True

B)False

Q2) Which of the following measures is used in the price sensitivity hedge ratio for bond futures?

A)beta

B)duration

C)correlation

D)variance

E)none of the above

Q3) An optimal hedge ratio is one in which the change in the futures price equals the change in the spot price.

A)True

B)False

Q4) The risk of the basis is usually less than the risk of the spot position.

A)True

B)False

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Chapter 12: Swaps

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Sample Questions

Q1) Which of the following distinguishes equity swaps from currency swaps?

A)equity swap payments are always hedged

B)equity swap payments are made on the first day of the month

C)equity swap payments can be negative

D)equity swap payments have more credit risk

E)none of the above

Q2) The present value of the series of dollar payments in a currency swap per $1 notional principal is $0.03.The present value of the series of euro payments in the same currency swap per 1 is 0.0225.The current exchange rate is $1.05 per euro.If the swap has a notional principal of $100 million and 105 million,find the market value of the swap from the perspective of the party paying euros and receiving dollars.

A)$519,375

B)-$2,480,625

C)$3,000,000

D)-$3,000,000

E)-$519,375

Q3) A risk of equity swaps is that the company will pay dividends.

A)True

B)False

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Page 14

Chapter 13: Interest Rate Forwards and Options

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Sample Questions

Q1) Which of the following strategies replicates a long position in an FRA?

A)long a long term Eurodollar time deposit and short a short-term Eurodollar time deposit

B)long a Eurodollar futures and short a Eurodollar option

C)long a Eurodollar option on a futures

D)short a long-term Treasury bond futures and short a short-term Treasury bond futures

E)long a receiver swaption

Q2) FRA payoffs are discounted by the current interest rate.

A)True

B)False

Q3) An interest rate collar is the purchase of a cap and a floor.

A)True

B)False

Q4) Interest rate caps are equivalent to a series of interest rate call options.

A)True

B)False

Q5) Receiver swaptions allow a firm to receive a floating rate.

A)True

B)False

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Chapter 14: Advanced Derivatives and Strategies

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Sample Questions

Q1) Which of the following statements is correct about cash-or-nothing options

A)they are subject to no credit risk

B)they must be priced by the binomial model

C)they have lower upside gains and lower downside losses than ordinary options

D)they are equivalent to short positions in asset-or-nothing options

E)none of the above

Q2) A PO is a security promising a stream of common stock dividend payments.

A)True

B)False

Q3) Which of the following statements about mortgage-backed security strips is true?

A)both interest-only and principal-only strips are subject to pre-payment risk

B)only principal-only strips are subject to prepayment risk

C)only interest-only strips are subject to prepayment risk

D)the prepayment risk of interest-only and principal-only strips is precisely offsetting E)none of the above

Q4) Equity-linked debt is equivalent to a zero coupon bond and a given number of call options.

A)True

B)False

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Chapter 15: Financial Risk Management Techniques and Applications

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Sample Questions

Q1) Which of the following techniques is a more appropriate risk management tool for a company in which asset value is not easily measurable?

A)stress risk

B)credit value at risk

C)market risk

D)delta at risk

E)cash flow at risk

Q2) Operational risk is more difficult to manage than market risk and credit risk.

A)True

B)False

Q3) What is the reason for undertaking a gamma hedge?

A)government regulation

B)the possibility of counterparty default

C)changes in volatility

D)large movements in the underlying

E)none of the above

Q4) Netting allows a significant reduction in credit risk but increases market risk

A)True

B)False

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Chapter 16: Managing Risk in an Organization

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Sample Questions

Q1) "Independent risk management" means which of the following?

A)that risk management of a firm is independent of its overall corporate policy decisions

B)that the risk management function is provided by an outside consulting firm

C)that the risk manager cannot be influenced by the traders

D)that the risk manager is independent of the firm's senior managers

E)none of the above

Q2) Derivatives dealers primarily conduct derivatives transactions for which of the following reasons?

A)to enhance the returns on their other investment transactions

B)to profit off of their ability to execute trades at the right time

C)to profit off of their market making services

D)to provide services to enhance the overall attractiveness of their product line

E)none of the above

Q3) A risk management system that controls risk within a single department is considered to be centralized.

A)True

B)False

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