Banking and Financial Markets
Final Test Solutions
Course Introduction
This course provides a comprehensive overview of the structure and functioning of banking systems and financial markets, focusing on their roles within the broader economy. Students will explore the operations of commercial and investment banks, the regulation and supervision of financial institutions, the mechanisms of money and capital markets, and the impact of monetary policy on financial stability. Key topics include the determination of interest rates, financial instruments, risk management, recent innovations in banking, and the evolution of global financial markets. The course equips students with analytical tools to critically evaluate current issues and trends in banking and finance.
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) A transaction in which an investor holds a position in the spot market and sells a futures contract or writes a call is
A)a gamble
B)a speculative position
C)a hedge
D)a risk-free transaction
E)none of the above
Answer: C
Q2) Derivatives permit investors to manage their risk more efficiently.
A)True
B)False
Answer: True
Q3) The market value of the derivatives contracts worldwide totals
A)less than a trillion dollars
B)in the hundreds of trillion dollars
C)over a trillion dollars but less than a hundred trillion
D)over quadrillion dollars
E)none of the above
Answer: C
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Page 3
Chapter 2: Structure of Options Markets
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55 Verified Questions
55 Flashcards
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Sample Questions
Q1) Which of the following are long-term options?
A)Bond options
B)LEAPS
C)currency options
D)Nikkei put warrants
E)none of the above
Answer: B
Q2) The advantages of the over-the-counter options market include all of the following except
A)customized contracts
B)privately executed
C)freedom from government regulation
D)lower prices
E)none of the above
Answer: D
Q3) Options traders who hold their positions for very short periods of time are called position traders.
A)True
B)False
Answer: False
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Chapter 3: Principles of Option Pricing
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Sample Questions
Q1) If an option portfolio generates a zero cash flow at expiration and a positive cash flow today,an arbitrage opportunity is available.
A)True
B)False
Answer: True
Q2) Which of the following statements about an American call is not true?
A)Its time value decreases as expiration approaches
B)Its maximum value is the stock price
C)It can be exercised prior to expiration
D)It pays dividends
E)none of the above
Answer: D
Q3) Even if there are no dividends on the stock,American put-call parity will not be the same as European put-call parity.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Option Pricing Models: the Binomial Model
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Sample Questions
Q1) A stock priced at 50 can go up or down by 10 percent over two periods.The risk-free rate is 4 percent.Which of the following is the correct price of an American put with an exercise price of 55?
A)7.88
B)3.38
Q2) 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
Q3) One way to model an option with dividends in the binomial framework is for the stock price minus the present value of the dividends to grow by the up and down factors. A)True
B)False
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Chapter 5: Option Pricing Models: the
Black-Scholes-Merton Model
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Sample
Questions
Q1) What happens when the volatility is zero in the Black-Scholes-Merton model?
A)the option price converges to either zero or the lower bound
B)the option price converges to the intrinsic value
C)the option automatically expires out of the money
D)the gamma and delta converge
E)none of the above
Q2) If we now assume that the stock pays a dividend at a known constant rate of 3.5 percent,what stock price should we use in the model? (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)22.60
B)19.65
C)23.00
D)21.99
E)none of the above
Q3) One of the inputs to the Black-Scholes-Merton model is the volatility over a recent time period.
A)True
B)False
Page 7
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Chapter 6: Basic Option Strategies
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Sample Questions
Q1) Both call and put writers have the potential for unlimited losses.
A)True
B)False
Q2) Which of the following transactions does not profit in a strong bull market.
A)a short put
B)a covered call
C)a protective put
D)a synthetic call
E)none of the above
Q3) Which of the following statements is true about the purchase of a protective put at a higher exercise price relative to a lower exercise price?
A)the breakeven is lower
B)the maximum loss is greater
C)the insurance is less costly
D)the insurance is more costly
E)none of the above
Q4) Covered call writing should be considered a strategy to enhance the return on a stock.
A)True
B)False
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Chapter 7: Advanced Option Strategies
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Sample Questions
Q1) To truly gain from a straddle,an investor must have a better estimate of volatility than everyone else.
A)True
B)False
Q2) What are the two breakeven stock prices at expiration?
A)$55.58 and $45.87
B)$54.13 and $45.87
C)$55.58 and $44.42
D)$59.71 and $40.29
E)none of the above
Q3) There are three breakeven stock prices in a butterfly spread. A)True
B)False
Q4) Early exercise is an important risk when call bear spreads and put bull spreads are used.
A)True
B)False
Q5) A ratio spread can be conducted with money spreads or time spreads. A)True
B)False
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Chapter 8: The Structure of Forward and Futures Markets
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Sample Questions
Q1) Most forward contracts are closed by
A)delivery
B)offset
C)exercise
D)default
E)none of the above
Q2) Which of the following is not a type of futures trader?
A)scalpers
B)arbitrageurs
C)profit-takers
D)hedgers
E)day traders
Q3) Very few futures contracts are terminated in delivery of the underlying commodity or security.
A)True
B)False
Q4) The clearinghouse is the middleman in a futures trade.
A)True
B)False
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Chapter 9: Principles of Pricing Forwards, Futures, and Options on Futures
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Sample Questions
Q1) The cost of carry futures pricing model requires that investors be able to sell short the commodity.
A)True
B)False
Q2) What is the lower bound of a European foreign currency call if the spot rate is $2.25,the domestic interest rate is 5.5 percent,the foreign interest rate is 6.2 percent,the option expires in three months,and the exercise price is $2.20?
A)$0.0457
B)$0.05
C)$0.0793
D)$0.0529
E)none of the above
Q3) The risk-free rate is missing from d<sub>1</sub> in the Black model because it is effectively zero.
A)True
B)False
Q4) Interest-rate parity is a cost-of-carry model.
A)True
B)False
11
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Chapter 10: Futures Arbitrage Strategies
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Sample Questions
Q1) How is the cost of a delivery option paid?
A)the long pays the short with a cash settlement
B)the short pays the long with a cash settlement
C)a higher closing futures price
D)a lower closing futures price
E)none of the above
Q2) The dollar value of a one basis point rise in the Fed funds futures price is
A)-$25.00
B)$41.67
C)$5,000
D)$25.00
E)none of the above
Q3) The end-of-the-month option is
A)the right to exercise an option on the last day of the month
B)an option expiring on the last day of the month
C)the right to deliver during the last seven business days of the month
D)an option that trades only at the end of the month
E)none of the above
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12
Chapter 11: Forward and Futures Hedging, Spread, and Target Strategies
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Sample Questions
Q1) When the target duration is set at zero,the correct number of futures contracts to use is the same as is obtained from the price sensitivity hedge ratio.
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) A hedge reduces risk because the futures price is less volatile than the spot price.
A)True
B)False
Q4) The basis is the ratio of the futures price to the spot price.
A)True
B)False
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Chapter 12: Swaps
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Sample Questions
Q1) A swap involving two floating rates is called a basis swap.
A)True
B)False
Q2) A risk of equity swaps is that the company will pay dividends.
A)True
B)False
Q3) Which of the following is not a way to terminate a swap:
A)the two counterparties cash settle the market value
B)enter into an opposite swap with another counterparty
C)hold the swap to its maturity date
D)use a forward contract or option on the swap to enter into an offsetting swap
E)borrow the notional principal and pay off the counterparty
Q4) For a currency swap with $10 million notional principal,the notional principal in British pounds if the exchange rate is $1.55 is (approximately)
A) 11.55 million
B) 15.5 million
C) 10 million
D) 6.45 million
E)none of the above
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Chapter 13: Interest Rate Forwards and Options
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Sample Questions
Q1) If a lender uses a collar,the transactions would be
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
Q2) An off-market FRA is one constructed outside of the over-the-counter market.
A)True
B)False
Q3) Interest rate caps are equivalent to a series of interest rate call options.
A)True
B)False
Q4) If interest rates increase,the holder of a long FRA benefits. A)True
B)False
Q5) Payer swaptions can be used to convert callable to non-callable debt.
A)True
B)False
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Chapter 14: Advanced Derivatives and Strategies
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Sample Questions
Q1) An inverse floater shortens its maturity when the underlying rate hits a certain level.
A)True
B)False
Q2) If the insured portfolio were dynamically hedged with stock index futures,how many futures would be used? The call delta is 0.52 and the continuous risk-free rate is 5.48 percent.Each futures has a multiplier of 250 and a price of 777.30.
A)60
B)64
C)30
D)32
E)none of the above
Q3) Weather derivative payoffs can be based on each of the following variables except
A)temperature above a given level
B)inches of snowfall
C)total value of insurance claims
D)temperature below a given level
E)sunshine
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Chapter 15: Financial Risk Management Techniques and Applications
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Sample Questions
Q1) Legal risk is the risk that the government will declare derivatives illegal.
A)True
B)False
Q2) The historical method of estimating Value at Risk uses the performance of the portfolio over the last ten years.
A)True
B)False
Q3) If a firm holds a position in an option,it can delta and gamma hedge the position by adding a position in another option.
A)True
B)False
Q4) A credit default swap is an ordinary swap that is subject to default.
A)True
B)False
Q5) The equity of a company with leverage is a put option on the assets.
A)True
B)False
Q6) 18.Credit derivatives are derivatives that are insured against credit losses.
A)True
B)False Page 17
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Page 18
Chapter 16: Managing Risk in an Organization
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Sample Questions
Q1) In a derivatives operations,back office personnel are in charge of front office personnel.
A)True
B)False
Q2) Which of the following would not be included among typical derivatives end users in the U.S.?
A)pension funds
B)corporations
C)state and local governments
D)the federal government
E)hedge funds
Q3) Which of the following statements is not true about fair value hedges?
A)it requires identification of the effective and ineffective parts
B)derivatives profits and losses are temporarily carried in an equity account
C)it requires proper documentation
D)only dealer firms are eligible to use it
E)none of the above
Q4) SEC disclosure requirements force companies to reveal how they manage all risks. A)True
B)False
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