Banking and Financial Services
Exam Solutions
Course Introduction
This course offers a comprehensive overview of the modern banking system and the wide array of financial services available in today's marketplace. Students will explore the structure and function of financial institutions, the process of financial intermediation, and the regulatory environment governing the industry. Key topics include retail and corporate banking, payment systems, risk management, investment services, and the impact of financial technology. By examining both traditional and emerging trends in banking, students will gain a solid foundation for understanding the strategic and operational challenges faced by financial service providers, as well as the essential role these institutions play in economic development.
Recommended Textbook
Introduction to Derivatives and Risk Management 9th Edition by Don M. Chance
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16 Chapters
945 Verified Questions
945 Flashcards
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Chapter 1: Introduction
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40 Verified Questions
40 Flashcards
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Sample Questions
Q1) The process of creating new financial products is sometimes referred to as
A) financial frontiering
B) financial engineering
C) financial modeling
D) financial innovation
E) none of the above
Answer: B
Q2) Exchange-traded derivatives volume is less than one billion according to the Futures Industry magazine in 2010.
A)True
B)False
Answer: False
Q3) The process of selling borrowed assets with the intention of buying them back at a later date and lower price is referred to as
A) longing an asset
B) asset flipping
C) shorting
D) anticipated price fall arbitrage
E) none of the above
Answer: C
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Chapter 2: Structure of Options Markets
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65 Verified Questions
65 Flashcards
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Sample Questions
Q1) The exchange with the largest share of the options market is the
A) American Stock Exchange
B) Boston Options Exchange
C) Chicago Board Options Exchange
D) Pacific Stock Exchange
E) Philadelphia Stock Exchange
Answer: C
Q2) An order that specifies a maximum price to pay if buying is a
A) stop order
B) market order
C) limit order
D) all or none order
E) none of the above
Answer: C
Q3) Exercise prices are set in $5 increments for options on exchanges.
A)True
B)False
Answer: False
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Chapter 3: Principles of Option Pricing
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60 Verified Questions
60 Flashcards
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Sample Questions
Q1) At expiration, the value of a European call is S<sub>T</sub> - X.
A)True
B)False
Answer: False
Q2) The spread between the prices of two European puts, alike in all respects except exercise price, cannot exceed the difference in their exercise prices.
A)True
B)False
Answer: True
Q3) The value of a European call is higher for lower strike prices.
A)True
B)False
Answer: True
Q4) What is the intrinsic value of the January 110 call?
A) 0.00
B) 8.30
C) 3.75
D) 5.00
E) none of the above
Answer: E
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Chapter 4: Option Pricing Models: The Binomial Model
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60 Verified Questions
60 Flashcards
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Sample Questions
Q1) 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
Q2) When the number of time periods in a binomial model is large, a European call option value does what?
A) fluctuates around its intrinsic value
B) converges to a specific value
C) increases without limit
D) converges to the European lower bound
E) none of the above
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
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6
Chapter 5: Option Pricing Models: The
Black-Scholes-Merton Model
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60 Verified Questions
60 Flashcards
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Sample Questions
Q1) When the risk-free rate is zero, the Black-Scholes formula converges to the intrinsic value.
A)True
B)False
Q2) In order to compute the implied volatility, one must force the option to be correctly priced by the model.
A)True
B)False
Q3) In the Black-Scholes-Merton model, stock prices are assumed to behave randomly. A)True B)False
Q4) The Black-Scholes-Merton formula requires cumulative probabilities from the lognormal distribution. A)True B)False
Q5) An approximate implied volatility for an at-the-money call can be solved directly. A)True B)False
7
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Chapter 6: Basic Option Strategies
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60 Verified Questions
60 Flashcards
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Sample Questions
Q1) A protective put can be profitable during a bull market, while a covered call is profitable only in a bear market.
A)True
B)False
Q2) Because of the greater time value, a call writer who closes the position prior to expiration will always pay more for the call than if the position were held to expiration.
A)True
B)False
Q3) Each of the following is a bullish strategy except A) a long call B) a short put C) a short stock D) a protective put E) none of the above
Q4) 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
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Chapter 7: Advanced Option Strategies
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60 Verified Questions
60 Flashcards
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Sample Questions
Q1) What is the profit if the stock price at expiration is $47?
A) -$102
B) $398
C) -$302
D) $500
E) none of the above
Q2) A call money spread that is closed prior to expiration has lower losses but higher profits for each stock price than if held to expiration.
A)True
B)False
Q3) A call butterfly spread combines a call bull spread with a call bear spread.
A)True
B)False
Q4) Which of the following have similar profit graphs?
A) call bull spread and long box spread
B) put bear spread and short box spread
C) butterfly spread and ratio spread
D) calendar spread and call bear spread
E) none of the above
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Chapter 8: Structure of Forward and Futures Markets
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61 Verified Questions
61 Flashcards
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Sample Questions
Q1) Which of the following is not a type of futures trader?
A) scalpers
B) arbitrageurs
C) profit-takers
D) hedgers
E) day traders
Q2) Most futures contracts are closed by
A) delivery
B) offset
C) exercise
D) default
E) none of the above
Q3) Which of the following organizations has the ultimate regulatory authority in the futures industry?
A) National Futures Association
B) Commodity Futures Trading Commission
C) Commodity Exchange Authority
D) Securities and Exchange Commission
E) none of the above
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Page 10
Chapter 9: Principles of Pricing Forwards, Futures and Options on Futures
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60 Verified Questions
60 Flashcards
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Sample Questions
Q1) Suppose you buy a one-year forward contract at $65. At expiration, the spot price is $73. The risk-free rate is 10 percent. What is the value of the contract at expiration?
A) $8.00
B) -$8.00
C) $0.00
D) $7.27
E) none of the above
Q2) The Black-Scholes-Merton formula can be used in place of the Black formula if you use the futures price for the stock price and a risk-free rate of zero.
A)True
B)False
Q3) Interest rate parity is essentially the same as
A) the cross-rate relationship
B) the cost of carry relationship
C) the Garman-Kohlhagen model
D) all of the above
E) none of the above
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Page 11
Chapter 10: Futures Arbitrage Strategies
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59 Verified Questions
59 Flashcards
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Sample Questions
Q1) The invoice price of a Treasury bond futures contract is based on the settlement price on position day and the conversion factor.
A)True
B)False
Q2) The coupon assumption for the conversion factor is 8 percent.
A)True
B)False
Q3) The transaction in which a Treasury bond futures spread is combined with a Fed funds futures transaction is called a
A) Bond-bill spread
B) MOB spread
C) designated order turnaround
D) turtle trade
E) none of the above
Q4) Foreign exchange carry arbitrage is based on a trader's expectations regarding purchasing power parity.
A)True
B)False
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Page 12
Chapter 11: Forward and Futures Hedging, Spread, and Target Strategies
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60 Verified Questions
60 Flashcards
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Sample Questions
Q1) Based on the price sensitivity hedge ratio, if the yield beta increases (assumed to be positive), then the optimal number of futures contracts increases. Assume the durations are positive.
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) All of the following are futures contract choice decisions related to hedging, except A) which future underlying asset
B) which strike price
C) which futures contract expiration
D) whether to go long or short
E) all of the above are futures contract choice decisions
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Chapter 12: Swaps
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60 Flashcards
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Sample Questions
Q1) The value of a floating-rate bond is par on each interest payment date.
A)True
B)False
Q2) In an index amortizing swap, the notional amount increases throughout the life of the swap.
A)True
B)False
Q3) Pricing a currency swap means to find the fixed rates in the two currencies. These fixed rates are the same as the fixed rates on plain vanilla swaps in the respective currencies.
A)True
B)False
Q4) Which of the following statements about diff swaps is true?
A) they involve interest payments in separate currencies
B) they are based on the difference between interest rates in two countries
C) they are based on the difference between interest rates of different maturities
D) the notional amount reduces throughout the life of the swap
E) the notional amount increases throughout the life of the swap
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Chapter 13: Interest Rate Forwards and Options
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60 Verified Questions
60 Flashcards
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Sample Questions
Q1) 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.
A) $125,000
B) $83,333
C) $208,000
D) -$75,000
E) none of the above
Q2) The Black model's accuracy in pricing interest rate options is greatest when the options have short maturities.
A)True
B)False
Q3) 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.
A)True
B)False
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Chapter 14: Advanced Derivatives and Strategies
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60 Verified Questions
60 Flashcards
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Sample Questions
Q1) Because a chooser option enables the holder to end up with either a put or a call, it is equivalent to a straddle.
A)True
B)False
Q2) If you buy an asset-or-nothing option and a cash-or-nothing option, you hold the equivalent of an ordinary European option.
A)True
B)False
Q3) The opportunity cost of portfolio insurance is the difference in the value of the insured portfolio and the value of the uninsured portfolio when the market goes up.
A)True
B)False
Q4) Barrier options either begin or end when the stock hits a certain price.
A)True
B)False
Q5) Large stock price moves reduce the effectiveness of portfolio insurance.
A)True
B)False
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Chapter 15: Financial Risk Management Techniques and Appplications
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60 Verified Questions
60 Flashcards
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Sample Questions
Q1) Which of the following are not methods of determining the VAR?
A) simulation method
B) historical method
C) estimation method
D) analytical method
E) none of the above
Q2) 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
Q3) Which of the following is the primary impetus for the growth in the practice of risk management?
A) faster computers
B) better pricing models
C) improved knowledge of risk management
D) tighter government regulation
E) concern over volatility
Page 17
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Chapter 16: Managing Risk in an Organization
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60 Flashcards
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Sample Questions
Q1) A risk management system that controls risk within a single department is considered to be centralized.
A)True
B)False
Q2) Barings lost $1.2 billion because of what?
A) a failure of risk controls in one of its foreign offices
B) model risk in their VAR models
C) fraudulent transactions
D) regulators shut it down because of poor risk management
E) speculating on German interest rates
Q3) Effective risk management requires that the front office clerical operations be separated from the back office trading operations.
A)True
B)False
Q4) Risk management in which risks such as financial market risk and insurance risk are managed jointly is called enterprise risk management.
A)True
B)False
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Page 18