Banking and Financial Services
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Course Introduction
Banking and Financial Services explores the structure, functions, and regulatory environment of banks and other financial institutions. The course covers key topics such as the role of financial intermediaries in the economy, types of financial products and services offered by banks, risk management, technology in banking, and the impacts of globalization and financial innovation. Students will also examine lending practices, payment systems, financial statement analysis of banks, and recent trends affecting the financial services industry, gaining practical skills and insights relevant to careers in banking, finance, and related sectors.
Recommended Textbook
Fundamentals of Futures and Options Markets Global Edition 8th Edition by John Hull
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Page 2
Chapter 1: Introduction
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Q1) A short forward contract on an asset plus a long position in a European call option on the asset with a strike price equal to the forward price is equivalent to
A)A short position in a call option
B)A short position in a put option
C)A long position in a put option
D)None of the above
Answer: C
Q2) A one-year call option on a stock with a strike price of $30 costs $3;a one-year put option on the stock with a strike price of $30 costs $4.Suppose that a trader buys two call options and one put option.The breakeven stock price above which the trader makes a profit is
A)$35
B)$40
C)$30
D)$36
Answer: A
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Chapter 2: Mechanics of Futures Markets
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Q1) Margin accounts have the effect of
A)Reducing the risk of one party regretting the deal and backing out
B)Ensuring funds are available to pay traders when they make a profit
C)Reducing systemic risk due to collapse of futures markets
D)All of the above
Answer: D
Q2) A company enters into a long futures contract to buy 1,000 units of a commodity for $60 per unit.The initial margin is $6,000 and the maintenance margin is $4,000.What futures price will allow $2,000 to be withdrawn from the margin account?
A)$58
B)$62
C)$64
D)$66
Answer: B
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Chapter 3: Hedging Strategies Using Futures
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Q1) Which of the following best describes the capital asset pricing model?
A)Determines the amount of capital that is needed in particular situations
B)Is used to determine the price of futures contracts
C)Relates the return on an asset to the return on a stock index
D)Is used to determine the volatility of a stock index
Answer: C
Q2) The basis is defined as spot minus futures.A trader is hedging the sale of an asset with a short futures position.The basis increases unexpectedly.Which of the following is true?
A)The hedger's position improves
B)The hedger's position worsens
C)The hedger's position sometimes worsens and sometimes improves
D)The hedger's position stays the same
Answer: A
Q3) What trade is necessary to increase beta to 1.8?
A)Long 192 contracts
B)Short 192 contracts
C)Long 96 contracts
D)Short 96 contracts
Answer: C
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Chapter 4: Interest Rates
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Q1) Which of the following is true?
A)When interest rates in the economy increase.all bond prices increase
B)As its coupon increases.a bond's price decreases
C)Longer maturity bonds are always worth more that shorter maturity bonds when the coupon rates are the same
D)None of the above
Q2) The six month and one-year rates are 3% and 4% per annum with semiannual compounding.Which of the following is closest to the one-year par yield expressed with semiannual compounding?
A)3.99%
B)3.98%
C)3.97%
D)3.96%
Q3) Which of the following is true of LIBOR?
A)The LIBOR rate is free of credit risk
B)A LIBOR rate is lower than the Treasury rate when the two have the same maturity
C)It is a rate used when borrowing and lending takes place between banks
D)It is subject to favorable tax treatment in the U.S.
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Chapter 5: Determination of Forward and Futures Prices
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Q1) Which of the following is an argument used by Keynes and Hicks?
A)If hedgers hold long positions and speculators holds short positions.the futures price will tend to be higher than expected future spot prices
B)If hedgers hold long positions and speculators holds short positions.the futures price will tend to be lower than expected future spot prices
C)If hedgers hold long positions and speculators holds short positions.the futures price will tend to be lower than today's spot prices
D)If hedgers hold long positions and speculators holds short positions.the futures price will tend to be higher than today's spot prices
Q2) Which of the following is a consumption asset?
A)The S&P 500 index
B)The Canadian dollar
C)Copper
D)IBM stock
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Chapter 6: Interest Rate Futures
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Q1) A portfolio is worth $24,000,000.The futures price for a Treasury note futures contract is 110 and each contract is for the delivery of bonds with a face value of $100,000.On the delivery date the duration of the bond that is expected to be cheapest to deliver is 6 years and the duration of the portfolio will be 5.5 years.How many contracts are necessary for hedging the portfolio?
A)100
B)200
C)300
D)400
Q2) In the U.S.what is the longest maturity for 3-month Eurodollar futures contracts?
A)2 years
B)5 years
C)10 years
D)20 years
Q3) Duration matching immunizes a portfolio against
A)Any parallel shift in the yield curve
B)All shifts in the yield curve
C)Changes in the steepness of the yield curve
D)Small parallel shifts in the yield curve
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Chapter 7: Swaps
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Q1) Which of the following is true?
A)OIS rates are less than the corresponding LIBOR rates
B)OIS rates are greater than corresponding LIBOR rates
C)OIS rates are sometimes greater and sometimes less than LIBOR rates
D)OIS rates are equivalent to one-day LIBOR rates
Q2) Which of the following describes an interest rate swap?
A)The exchange of a fixed rate bond for a floating rate bond
B)A portfolio of forward rate agreements
C)An agreement to exchange interest at a fixed rate for interest at a floating rate
D)All of the above
Q3) Since the 2008 credit crisis
A)LIBOR has replaced OIS as the discount rate for non-collateralized swaps
B)OIS has replaced LIBOR as the discount rate for non-collateralized swaps
C)LIBOR has replaced OIS as the discount rate for collateralized swaps
D)OIS has replaced LIBOR as the discount rate for collateralized swaps
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9
Chapter 8: Securitization and the Credit Crisis of 2007
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Q1) Which of the following describes the S&P/Case-Shiller index?
A)A stock market index
B)An index of interest rates on mortgages
C)An index of house prices
D)An index showing the dollar amount of mortgages granted each month
Q2) AIG lost money because
A)It bought tranches created from mortgages
B)It invested heavily in real estate
C)It invested heavily in the stock market
D)It insured AAA tranches of ABS CDOs
Q3) Which of the following survived the crisis without declaring bankruptcy or being taken over by another financial institution?
A)Bear Stearns
B)Morgan Stanley
C)Lehman Brothers
D)Merrill Lynch
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Chapter 9: Mechanics of Options Markets
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Q1) In which of the following cases is an asset NOT considered constructively sold?
A)The owner shorts the asset
B)The owner buys an in-the-money put option on the asset
C)The owner shorts a forward contract on the asset
D)The owner shorts a futures contract on the stock
Q2) The price of a stock is $64.A trader buys 1 put option contract on the stock with a strike price of $60 when the option price is $10.When does the trader make a profit?
A)When the stock price is below $60
B)When the stock price is below $64
C)When the stock price is below $54
D)When the stock price is below $50
Q3) An investor has exchange-traded put options to sell 100 shares for $20.There is a 2 for 1 stock split.Which of the following is the position of the investor after the stock split?
A)Put options to sell 100 shares for $20
B)Put options to sell 100 shares for $10
C)Put options to sell 200 shares for $10
D)Put options to sell 200 shares for $20
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11
Chapter 10: Properties of Stock Options
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Q1) Which of the following is true?
A)An American call option on a stock should never be exercised early
B)An American call option on a stock should never be exercised early when no dividends are expected
C)There is always some chance that an American call option on a stock will be exercised early
D)There is always some chance that an American call option on a stock will be exercised early when no dividends are expected
Q2) Which of the following describes a situation where an American put option on a stock becomes more likely to be exercised early?
A)Expected dividends increase
B)Interest rates decrease
C)The stock price volatility decreases
D)All of the above
Q3) Which of the following best describes the intrinsic value of an option?
A)The value it would have if the owner were forced to exercise immediately
B)The Black-Scholes-Merton price of the option
C)The lower bound for the option's price
D)The amount paid for the option
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Page 12
Chapter 11: Trading Strategies Involving Options
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Q1) Which of the following describes a covered call?
A)A long call option on a stock plus a long position in the stock
B)A long call option on a stock plus a short put option on the stock
C)A short call option on a stock plus a short position in the stock
D)A short call option on a stock plus a long position in the stock
Q2) How can a strangle trading strategy be created?
A)Buy one call and one put with the same strike price and same expiration date
B)Buy one call and one put with different strike prices and same expiration date
C)Buy one call and two puts with the same strike price and expiration date
D)Buy two calls and one put with the same strike price and expiration date
Q3) How can a strip trading strategy be created?
A)Buy one call and one put with the same strike price and same expiration date
B)Buy one call and one put with different strike prices and same expiration date
C)Buy one call and two puts with the same strike price and expiration date
D)Buy two calls and one put with the same strike price and expiration date
Q4) Which of the following creates a bull spread?
A)Buy a low strike price call and sell a high strike price call
B)Buy a high strike price call and sell a low strike price call
C)Buy a low strike price call and sell a high strike price put
D)Buy a low strike price put and sell a high strike price call
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Chapter 12: Introduction to Binomial Trees
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Q1) A stock is expected to return 10% when the risk-free rate is 4%.What is the correct discount rate to use for the expected payoff on an option in the real world?
A)4%
B)10%
C)More than 10%
D)It could be more or less than 10%
Q2) The current price of a non-dividend paying stock is $30.Use a two-step tree to value a European call option on the stock with a strike price of $32 that expires in 6 months.Each step is 3 months,the risk free rate is 8% per annum with continuous compounding.What is the option price when u = 1.1 and d = 0.9?
A)$1.29
B)$1.49
C)$1.69
D)$1.89
Q3) Which of the following is necessary to hedge the position?
A)Buy 0.2 shares for each option purchased
B)Sell 0.2 shares for each option purchased
C)Buy 0.8 shares for each option purchased
D)Sell 0.8 shares for each option purchased
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Page 14
Chapter 13: Valuing Stock Options: The BSM Model
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Q1) Which of the following is NOT true?
A)Risk-neutral valuation assumes that investors are risk neutral
B)Options can be valued based on the assumption that investors are risk neutral
C)In risk-neutral valuation the expected return on all investment assets is set equal to the risk-free rate
D)In risk-neutral valuation the risk-free rate is used to discount expected cash flows
Q2) When there are two dividends on a stock,Black's approximation sets the value of an American call option equal to which of the following?
A)The value of a European option maturing just before the first dividend
B)The value of a European option maturing just before the second (final)dividend
C)The greater of the values in A and B
D)The greater of the value in B and the value assuming no early exercise
Q3) Which of the following is a definition of volatility?
A)The standard deviation of the return.measured with continuous compounding.in one year
B)The variance of the return.measured with continuous compounding.in one year
C)The standard deviation of the stock price in one year
D)The variance of the stock price in one year
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Chapter 14: Employee Stock Options
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Q1) Which of the following was true about employee stock options between 1996 and 2004?
A)The options never had any affect on a company's financial statements
B)The value of options which were at-the-money when issued had to be expensed on the income statement
C)The value of options which were at-the-money when issued had to be reported in the notes to the financial statements
D)Options which were at-the-money when issued did not affect a company's financial statements
Q2) Which of the following are true of employee stock options?
A)They are commonly valued as though they are regular American options
B)They are commonly valued as though they are regular American options.but with a reduced life
C)They are commonly valued as though they are regular European option
D)They are commonly valued as though they are regular European options but with a reduced life
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Chapter 15: Options on Stock Indices and Currencies
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Q1) For a European call option on a currency,the exchange rate is 1.0000,the strike price is 0.9100,the time to maturity is one year,the domestic risk-free rate is 5% per annum,and the foreign risk-free rate is 3% per annum.How low can the option price be without there being an arbitrage opportunity?
A)0.1048
B)0.0900
C)0.1344
D)0.1211
Q2) What is the size of one option contract on the S&P 500?
A)250 times the index
B)100 times the index
C)50 times the index
D)25 times the index
Q3) Which of the following is NOT true about a range forward contract?
A)It ensures that the exchange rate for a future transaction will lie between two values
B)It can be structured so that it costs nothing to set up
C)It is constructed from two options and a forward contract
D)It can be used to hedge either a future inflow or a future outflow of a foreign currency
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Chapter 16: Futures Options
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Q1) One-year European call and put options on an asset are worth $3 and $4 respectively when the strike price is $20 and the one-year risk-free rate is 5%.What is the one-year futures price of the asset if there are no arbitrage opportunities? (Use put-call parity.)
A)$19.55
B)$18.95
C)$20.95
D)$20.45
Q2) Which of the following is true about a futures option and a spot option on the same underlying asset with an identical strike price and expiration date?
A)A European call spot option and an American call futures option are equivalent
B)An American call spot option and a European call futures option are equivalent
C)A European put spot option and European put futures option are equivalent
D)An American put spot option and American put futures option are equivalent
Q3) What is the probability of an up movement in a risk-neutral world?
A)0.4
B)0.5
C)0.72
D)0.6
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Page 18
Chapter 17: The Greek Letters
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Q1) What does gamma measure?
A)The rate of change of delta with the asset price
B)The rate of change of the portfolio value with the passage of time
C)The sensitivity of a portfolio value to interest rate changes
D)None of the above
Q2) What does rho measure?
A)The rate of change of delta with the asset price
B)The rate of change of the portfolio value with the passage of time
C)The sensitivity of a portfolio value to interest rate changes
D)None of the above
Q3) Gamma tends to be high for which of the following?
A)At-the money options
B)Out-of-the money options
C)In-the-money options
D)Options with a long time to maturity
Q4) Which of the following could NOT be a delta-neutral portfolio?
A)A long position in call options plus a short position in the underlying stock
B)A short position in call options plus a short position in the underlying stock
C)A long position in put options and a long position in the underlying stock
D)A long position in a put option and a long position in a call option
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Chapter 18: Binomial Trees in Practice
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Q1) For an option on futures,the volatility is 35%,the time step is three months,and the risk-free rate is 5%.What is the Cox,Ross,Rubinstein parameter,u?
A)1.34
B)1.29
C)1.09
D)1.19
Q2) Which of the following is true for u in a Cox-Ross-Rubinstein binomial tree?
A)It depends on the interest rate and the volatility
B)It depends on the volatility but not the interest rate
C)It depends on the interest rate but not the volatility
D)It depends on neither the interest rate nor the volatility
Q3) How many different paths are there through a Cox-Ross-Rubinstein tree with four-steps?
A)5
B)9
C)12
D)16
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Chapter 19: Volatility Smiles
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Q1) Which of the following causes a volatility smile that is a "frown"?
A)There is a small probability of a large stock price decrease in one week
B)There is a small probability of a large stock price increase in one week
C)The outcome of a lawsuit (roughly equal chance of being favorable or unfavorable)will create a large movement up or down in one week
D)None of the above
Q2) Which of the following is NOT true?
A)A volatility surface provides more information than a single volatility smile
B)A volatility surface is used to determine the implied volatility of an option that does not trade actively
C)A volatility surface can be determined from a single volatility smile using interpolation
D)A volatility surface incorporates information about options with different maturity dates
Q3) Which of the following could be a result of "crashophobia"?
A)High volatilities for in-the-money calls
B)High volatilities for in-the-money puts
C)High volatilities for at-the-money calls
D)Low volatilities for at-the-money puts
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Chapter 20: Value at Risk
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Q1) Which of the following is a definition of the covariance between X and Y?
A)Correlation between X and Y times variance of X times variance of Y
B)Variance of X times the variance of Y
C)Correlation between X and Y divided by the product of the standard deviation of X and the standard deviation of Y
D)Correlation between X and Y times standard deviation of X times standard deviation of Y
Q2) Which of the following is true of the historical simulation method for calculating VaR?
A)It fits historical data on the behavior of variables to a normal distribution
B)It fits historical data on the behavior of variables to a lognormal distribution
C)It assumes that what will happen in the future is a random sample from what has happened in the past
D)It uses Monte Carlo simulation to create random future scenarios
Q3) What is the 99% expected shortfall?
A)$0.145 million
B)$0.14 million
C)$0.13 million
D)$0.10 million
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22
Chapter 21: Interest Rate Options
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Q1) Which of the following is true?
A)A puttable bond allows the lender to ask for the principal to be repaid early
B)A puttable bond allows the borrower to repay the principal early
C)A puttable bond is a bond with an embedded stock option
D)None of the above
Q2) A floating-rate lender wants to use a collar as a hedge.Which of the following is appropriate?
A)Buy a cap and sell a floor
B)Buy a cap and buy a floor
C)Sell a cap and sell a floor
D)Sell a cap and buy a floor
Q3) Which of the following is assumed to be lognormal when a bond option is valued?
A)A future bond price
B)A future swap rate
C)A future short-term rate
D)A future bond yield
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Chapter 22: Exotic Options and Other Nonstandard Products
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Q1) As the barrier is observed more frequently,a knock out option becomes which of the following?
A)More valuable
B)Less valuable
C)There is no effect on value
D)May become more valuable or less valuable
Q2) Which of the following is equivalent to a long position in a European call option?
A)A short position in a cash-or-nothing put option plus a long position in an asset-or-nothing put option
B)A long position in an asset-or-nothing put option plus a long position in a cash-or-nothing put option
C)A long position in an asset-or-nothing call option plus a long position in a cash-or-nothing call option
D)A long position in an asset-or-nothing call option plus a short position in a cash-or-nothing call option
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Chapter 23: Credit Derivatives
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Q1) For what range of losses is the equity tranche of iTraxx (or CDX NA IG)responsible?
A)0 to 10%
B)0 to 7%
C)0 to 6%
D)0 to 3%
Q2) What is the number of companies underlying the iTraxx index?
A)50
B)75
C)100
D)125
Q3) What is the rating of the companies underlying the iTraxx index?
A)A or above
B)BBB or above
C)BB or below
D)BBB or below
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25
Chapter 24: Weather, Energy, and Insurance Derivatives
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Q1) Which of the following is NOT true about electricity?
A)Supply and demand for electricity are matched within 140 control areas in the US.then excess power sold to other control areas
B)The ability to sell excess power is constrained by transmission capacity
C)Electricity is a commodity that can be easily stored
D)Air conditioning is a big use of electricity
Q2) Which of the following describes a typical reinsurance contract?
A)Covers a percentage of all losses by an insurance company
B)Covers all losses of the insurance company up to a certain amount
C)Covers all losses of the insurance company above a certain amount
D)Covers all losses of the insurance company between two amounts
Q3) What is the day's CDD?
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