Capital Markets
Exam Questions
Course Introduction
Capital Markets explores the structure, functions, and significance of financial markets that facilitate the issuance and trading of securities like stocks and bonds. The course examines key participants such as investors, issuers, and intermediaries while delving into the mechanisms of primary and secondary markets. Students learn about the regulatory environment, market efficiency, valuation of financial instruments, and the impact of global and technological advancements on capital flows. By analyzing real-world case studies, the course equips students with a comprehensive understanding of how capital markets allocate resources, manage risk, and foster economic growth.
Recommended Textbook
Foundations of Financial Markets and Institutions 4th Edition by Frank J. Fabozzi
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Chapter 1: Introduction
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Q1) A intangible asset is one whose value depends on particular physical properties such as buildings, land, or machinery. Tangible assets, by contrast, represent legal claims to some future benefit.
A)True
B)False
Answer: False
Q2) A principal economic function to transfer funds from those who have ________ to invest to those who need funds to invest in ________.
A) deficit funds; tangible assets.
B) surplus funds; intangible assets.
C) deficit funds; intangible assets.
D) surplus funds; tangible assets.
Answer: D
Q3) The market participants include households, business entities, national governments, national government agencies, state and local governments, supranationals, and regulators.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Financial Institutions, Financial Intermediaries, and Asset Management Firms
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Q1) Some nonfinancial enterprises have subsidiaries that provide financial services. These financial institutions are called ________.
A) free finance companies.
B) captive finance companies.
C) captive investment companies.
D) captive finance shares.
Answer: B
Q2) In addition to uncertainty about the timing and amount of the cash outlays, and the potential for the depositor or policyholder to withdraw cash early or borrow against a policy, a financial institution has to be concerned with possible reduction in cash inflows.
A)True
B)False
Answer: True
Q3) An important risk that is often overlooked but has been the cause of the demise of some major financial institutions is value-at risk.
A)True
B)False
Answer: False
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Chapter 3: Depository Institutions: Activities and Characteristics
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Q1) S&Ls invest in short-term assets for ________.
A) liquidity and non-regulatory purposes.
B) long-term and regulatory purposes.
C) operational and regulatory purposes.
D) operational and illiquidity purposes.
Answer: C
Q2) The maximum interest rate that is permitted on deposit accounts has been phased out by the Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA).
A)True
B)False
Answer: True
Q3) Risk-based capital guidelines establish a ________ weight for all assets where a weight depends on the credit risk associated with each asset.
A) commercial bank risk
B) scientific-based
C) credit risk
D) guideline-based
Answer: C
Page 5
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Chapter 4: The US Federal Reserve and the Creation of Money
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Q1) Which of the following does the central bank of the United Kingdom identify as its role in maintaining financial stability?
A) Risk Assessment
B) Risk Enhancement
C) Oversight of Crisis System
D) Crisis Payment System
Q2) Dramatic evidence of the growing importance of international policy coordination on monetary matters occurred in two meetings of central bankers of the large industrial nations in the mid 1980s.
A)True
B)False
Q3) Briefly discuss the nature of a closed economy and an open economy.
Q4) ________ is oversight of the main payment and settlement systems in the U.K. that are used for many types of financial transaction - from paying wages and credit card bills to the settlement of transactions between financial institutions.
A) Risk Payment Systems
B) Crisis Oversight
C) Risk Oversight
D) Oversight of Payment Systems
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Chapter 5: Monetary Policy in the United States
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Q1) The account of the widely accepted goals of monetary policy reveals a profound problem in the conduct of monetary policy. The goals are numerous, but the Fed's capabilities are limited. Describe the two limitations.
Q2) The Fed seeks to achieve its goals through a form of chain reaction. Describe the chronology and structure of this chain reaction explaining how operating and intermediate targets are used to achieve the Fed's ultimate goals?
Q3) Intermediate targets may include monetary aggregates and interest rates, but never include foreign currency exchange rates.
A)True
B)False
Q4) The expansion in the monetary aggregates was particularly rapid from 1975 to 1978, and that expansion (along with the oil shocks) led to ________.
A) mild inflation and a decline in the dollar's value.
B) serious inflation and a decline in the dollar's value.
C) serious inflation and a rise in the dollar's value.
D) mild inflation and a moderate decline in the dollar's value.
Q5) Discuss two problems that the Fed has in implementing monetary policy.
Q6) Identify and briefly describe three of the major goals of Fed policy.
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Chapter 6: Insurance Companies
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Q1) For ________, the risk insured against is the death of the "insured."
A) life insurance
B) health insurance
C) property insurance
D) automobile insurance
Q2) Contrast the fundamental difference between an insurance company and a bread manufacturer.
Q3) Under what condition can a participating policy pay a higher dividend than the guaranteed minimum?
Q4) A new form of insurance company, which is a hybrid between a pure mutual and a pure stock company, has been approved by some states and implemented by some insurance companies in these states since their introduction in 1996. This form is called a
A) stock insurance company (SIC)
B) mutual insurance company (MIC)
C) mutual molding company (MMC)
D) mutual holding company (MHC)
Q5) Name and briefly describe four major types of insurance.
Q6) Explain survivorship insurance or second-to-die insurance.
Q7) Explain the concept of a multiline company.
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Chapter 7: Investment Companies and Exchange Traded Funds
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Q1) The price of a share in a closed-end fund is not determined by supply and demand, so the price can fall below or rise above the net asset value per share.
A)True
B)False
Q2) Mutual funds be included in different investment vehicles. Given an example and in your example discuss a nonqualified vehicle and the inclusion of a retirement plan and an education plan.
Q3) Mutual funds have become very popular with individual investors since the 1980s. However, they are often criticized for two reasons. Which of the below is ONE of these reasons.
A) Purchases and sales cannot be made at intraday prices, but only at the end-of-the-day closing prices.
B) Transactions can be made at intraday prices.
C) Withdrawals by some fund shareholders cannot cause taxable realized capital gains (or losses) for shareholders even though they maintain their positions.
D) None of these
Q4) Explain what is meant by an index fund. In your answer contrast it with an active fund.
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Chapter 8: Pension Funds
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Q1) Pension plan sponsors may be private business entities acting for their employees; federal, state, and local entities on behalf of their employees; unions on behalf of their members; and individuals for themselves.
A)True
B)False
Q2) Describe the players chosen by a plan sponsor to manage the defined-benefit pension assets.
Q3) The magnitude of pension ________ suggests that it poses the greatest financial danger facing managers since the S&L crisis.
A) solvency
B) surplus
C) overfunding
D) underfunding
Q4) ERISA established fiduciary standards for pension fund trustees, managers, and advisors. Specifically, all parties responsible for the management of a pension fund are guided by the judgment of what is called a "wild man" in seeking to determine which investments are proper.
A)True
B)False
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Chapter 9: Properties and Pricing of Financial Assets
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Q1) Suppose that the required yield on a 6% coupon, 12-year bond increases from 10% to 11% (0.01 in decimal form). If this bond's duration is 8.96, what is the approximate percentage change in price?
A) -4.48%
B) +7.48%
C) -8.96%
D) +9.86%
Q2) This measure of price sensitivity is popularly referred to as ________.
A) basis point sensitivity.
B) value sentiment.
C) duration.
D) saturation.
Q3) The term duration was first used in 1938 by Frederick Macaulay as a measure of the weighted average time to maturity of a bond.
A)True
B)False
Q4) The price of a complex asset is the sum of the prices of its component parts.
A)True
B)False
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Chapter 10: The Level and Structure of Interest Rates
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Q1) The ________ rate of interest is determined by interaction of the supply and demand functions. As a cost of borrowing and a reward for lending, the rate must reach the point where total supply of savings ________ total demand for borrowing and investment.
A) equilibrium; is greater B) minimum; equals C) equilibrium; equals D) minimum; is greater
Q2) Consider an investor facing a 40% marginal tax rate who purchases a tax-exempt issue with a yield of 3.00%. The equivalent taxable yield is 5.00%.
A)True
B)False
Q3) The most recently auctioned Treasury issues for each maturity are referred to as ________.
A) off-the-run issues or current coupon issues.
B) minimum interest rate or base interest rate
C) on-the- run or current coupon issues.
D) benchmark interest rate or minimum interest rate.
Q4) Explain what is meant by the liquidity effect.
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Chapter 11: The Term Structure of Interest Rates
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Q1) It is important to remember that the basic principle underlying bootstrapping is that the value of the Treasury coupon security should be equal to the value of the package of ________ that duplicates the ________.
A) coupon paying T-Bills; coupon bond's cash flow
B) zero-coupon Treasury securities; coupon bond's cash flow
C) coupon paying T-Bills; discount bond's cash flow
D) zero-coupon Treasury securities; discount bond's cash flow
Q2) For the liquidity theory, the shape of the yield curve is determined by supply of and demand for securities within each maturity sector.
A)True
B)False
Q3) The slope of a yield curve is commonly measured in terms of ________, which is the difference between long-term and short-term yields.
A) the yield curve spread
B) the maturity spread
C) the default spread
D) the interest rate spread
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Chapter 12: Risk/Return and Asset Pricing Models
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Q1) There have been two major attacks on standard portfolio theory. Which of the below is ONE of these?
A) One is the attack by the behavioral finance camp as to how consumers make decisions.
B) One is the attack on the nature of the return distribution based on what has been theoretically decreed for financial assets.
C) One is the attack on binomial distribution of returns assumed for financial assets.
D) One is the attack by the behavioral finance camp as to how investors make decisions.
Q2) ________ postulates that a security's expected return is influenced by a variety of factors, as opposed to just the single market index.
A) The arbitrage pricing theory model
B) The CAPM
C) The multifactor CAPM
D) The capital asset pricing model
Q3) Explain the concept of framing.
Q4) Describe the multifactor CAPM and how it extends the CAPM.
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14
Chapter 13: Primary Markets and the Underwriting of Securities
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Q1) Depending on the type of underwriting agreement, the underwriting function may expose the investment banking firm to the risk of selling the securities to the public at a price greater than the price paid to the issuer.
A)True
B)False
Q2) Rule 415 permits certain issuers to file a single registration document indicating that they intend to sell a certain amount of a certain class of securities at one or more times within the next two years.
A)True
B)False
Q3) The Securities Act of 1933 does not provide specific guidelines to identify what is a ________.
A) private security.
B) public placement.
C) public offering.
D) private offering.
Q4) The Securities Acts allow three exemptions from federal registration. Describe two of these three exemptions.
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Q5) What is the waiting period? What do underwriters do during the waiting period?
Chapter 14: Secondary Markets
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Q1) A perfect market results when all buyers and sellers are ________, and the market price is determined where there is ________.
A) price-takers; equality of supply and demand.
B) price-makers; equality of supply and demand.
C) price-takers; inequality of supply and demand.
D) price-makers; inequality of supply and demand.
Q2) A market is not perfect only because market agents are price takers but is also free of transactions costs and any impediment to the interaction of supply and demand for the commodity. Economists refer to these various costs and impediments as frictions. Frictions include ________.
A) bid-ask spreads charged by dealers and order handling and clearance charges.
B) taxes (but not on capital gains) and government-imposed transfer fees.
C) costs of acquiring information about the financial asset and restrictions on market takers.
D) financial liability that a buyer or seller may take and taxes on capital gains.
Q3) A perfect market does not allow the sale of borrowed securities.
A)True
B)False
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Chapter 15: Treasury and Agency Securities Markets
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Q1) Two factors account for the prominent role of U.S. Treasury securities: ________.
A) volume (in terms of shares outstanding) and liquidity.
B) volume (in terms of dollars outstanding) and illiquidity.
C) volume (in terms of dollars outstanding) and liquidity.
D) volume (in terms of shares outstanding) and illiquidity.
Q2) Financial theory tells us that the theoretical value of a Treasury security should be equal to the present value of the cash flow where each cash flow is discounted at the appropriate theoretical spot rate.
A)True
B)False
Q3) When the Fed buys collateral for its own account, this is called a collateral system. A)True
B)False
Q4) The repo rate will be slightly below the federal funds rate because a repo involves collateralized borrowing, while a federal funds transaction is unsecured borrowing.
A)True
B)False
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Chapter 16: Municipal Securities Markets
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Q1) A general obligation bond is secured by the issuer's limited taxing power.
A)True
B)False
Q2) For a tax-exempt municipal security, as the marginal tax rate ________, the price of a tax?exempt municipal security will ________.
A) declines; rise.
B) declines; decline.
C) rises; rise.
D) rises; decline.
Q3) Dealer spreads depend on several factors. For the retail investor, the dealer spread rarely exceeds one-half of one point ($25 per $5,000 of par value).
A)True
B)False
Q4) Tax-backed debt includes ________.
A) general obligation debt.
B) appropriation-backed obligations.
C) debt obligations supported by public credit enhancement programs.
D) All of these
Q5) Cite two reasons for the exemption afforded municipal securities.
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Chapter 17: Markets for Common Stock: The Basic
Characteristics
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Q1) From a dealer's perspective, program trades can be conducted in two ways. Name and describe these two ways.
Q2) Stock market indicators ________.
A) have come to perform a variety of functions, from serving as benchmarks for evaluating the performance of professional money managers to answering the question "How did the market do today?"
B) have not yet become a part of everyday life.
C) are used interchangeably because each indicator applies to, and measures, the same facet of the stock market.
D) are inaccurate assessments of how the markets are performing.
Q3) Participants in the upstairs market play a key role ________.
A) by providing liquidity to the market so that institutional trades can be executed.
B) through arbitrage activities that help to integrate the mended institutional market.
C) by providing liquidity to the market so as to integrate the fragmented stock market.
D) by providing arbitrage opportunities to the market so that institutional trades can be executed.
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Chapter 18: Markets for Common Stock: Structure and Organization
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Q1) Amex ________.
A) lists stocks from throughout the United States but not international stocks.
B) is a national exchange.
C) is not an auction-type market based on orders.
D) has a specialist system that is dissimilar to that of the NYSE.
Q2) The Pacific Exchange (PHLX) is the oldest stock exchange in the United States, founded in 1790.
A)True
B)False
Q3) Exchanges ________.
A) have traditionally been organizations built around an electronic trading floor.
B) have usually been mutual organizations that are owned and operated on a profit basis for the benefit of their members, those who operate on the trading floor.
C) have memberships or "seats" that provide floor access or trading privileges but not ownership rights.
D) None of these
Q4) Describe the tasks of a NYSE specialist.
Q5) Contrast the NYSE exchange with Nasdaq
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Chapter 19: Markets for Corporate Senior Instruments: I
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Q1) Medium-term notes are not rated by the nationally recognized rating companies.
A)True
B)False
Q2) Unlike corporate bonds, medium-term notes are typically issued on a ________ rather than underwritten by an investment banker.
A) competitive basis
B) best efforts basis
C) come-first basis
D) come-last basis
Q3) Which of the below statements is FALSE?
A) Commercial paper is rated by the government.
B) Commercial paper can be directly placed by the issuer or issued by using the services of an agent or intermediary.
C) Other countries have developed their own commercial paper markets, and there is a Eurocommercial paper market.
D) By using credit support, smaller and less well-known companies with lower credit ratings have been able to issue paper.
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21
Chapter 20: Markets for Corporate Senior Instruments: II
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Q1) Business risk is the risk associated with operating cash flows.
A)True
B)False
Q2) One of the four general classifications used by bond information includes the class called "utilities," which can be further broken down into ________.
A) electric power companies, gas distribution companies, water companies, and communication companies.
B) airlines, railroads, and trucking companies.
C) manufacturing, merchandising, and service companies.
D) depository institutions, non-life insurance companies, and mutual funds.
Q3) Preferred stock has no important similarities with debt.
A)True
B)False
Q4) A provision in the tax code exempts ________ from federal income taxation, if the recipient is a qualified corporation.
A) 50% of qualified dividends
B) 70% of qualified dividends
C) 50% of nonqualified dividends
D) 70% of nonqualified dividends
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Chapter 21: The Markets for Bank Obligations
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Q1) Which of the below statements is FALSE?
A) Prime CDs (those issued by high-rated domestic banks) trade at a lower yield than nonprime CDs (those issued by lower-rated domestic banks).
B) The yields posted on CDs vary depending on three factors: (1) the credit rating of the issuing bank, (2) the maturity of the CD, and (3) the supply and demand for CDs.
C) The rate or yield offered on Eurodollar CDs is the prime rate.
D) Eurodollar CDs are dollar obligations that are payable by an entity operating under a foreign jurisdiction, exposing the holders to a risk (referred to as sovereign risk) that their claim may not be enforced by the foreign jurisdiction.
Q2) ________ are foreign banks with U.S. branches.
A) Yankee banks
B) German banks
C) Japanese banks
D) Mexican banks
Q3) The yields posted on CDs vary depending on three factors. Name these three factors.
Q4) Why might some federal funds transactions require the use of a broker?
Q5) What are the four types of CDs, according to the issuing institution.
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Chapter 22: The Residential Mortgage Market
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Q1) Which of the below statements is FALSE?
A) If a lender decides to lend the funds, it sends a commitment letter to the applicant whereby this letter commits the lender to provide funds to the applicant.
B) At the time the application is submitted, the mortgage originator will give the applicant a choice among various types of mortgages.
C) Mortgage originators cannot sell the mortgage to an investor that wishes to hold the mortgage in its portfolio.
D) The interest rate that the originator will set on the loan, referred to as the note rate, will depend on the interest rate required by the investor who plans to purchase the mortgage.
Q2) A mortgage ________.
A) is a collection of markets, which includes a primary (or origination) market and a secondary market where mortgages trade.
B) refers to real estate.
C) is a pledge of property to secure payment of a debt.
D) gives the borrower right to foreclose the loan and seize the property in order to ensure that it is repaid.
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Chapter 23: Mortgage-Backed Securities Market
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Q1) The mission of Fannie Mae and Freddie Mac is to support the liquidity and stability of the mortgage market by ________.
A) buying and selling railway trusts.
B) creating pass-through securities that are not guaranteed.
C) selling but not buying mortgage-backed securities.
D) None of these
Q2) The cash flow of a mortgage pass-through is projected based on an assumed PSA. A)True
B)False
Q3) The cash flow of a mortgage pass-through security ________.
A) consists of monthly mortgage payments representing interest and the scheduled repayment of principal, but not on any prepayments.
B) is more than the monthly cash flow of the underlying mortgages by an amount equal to servicing and other fees.
C) depends on the cash flow of the underlying mortgages.
D) All of these
Q4) What does the creation of a CMO accomplish? Briefly explain.
Q5) What is an IO?
Q6) Describe "excess spread" as a from of credit enhancement.
Page 25
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Chapter 24: Market for Commercial Mortgage Loans and Commercial
Mortgage-Backed Securities
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Q1) For commercial mortgage loans, call protection can take the following forms:
A) prepayment lockout and defeasance.
B) prepayment lockout and prepayment penalty points.
C) defeasance and yield maintenance charges.
D) All of these
Q2) Commercial mortgage loans are ________, which means that if the borrower fails to make the contractual payments, the lender can only look to the income-producing property backing the loan for interest and principal repayment.
A) nonpayment loans
B) contractless loans
C) remedial loans
D) nonrecourse loans
Q3) A commercial mortgage loan is originated either to ________.
A) finance a commercial purchase or to refinance a prior mortgage obligation.
B) finance a residential purchase or to refinance a prior mortgage obligation.
C) finance a commercial purchase or to refinance a subsequent mortgage obligation.
D) None of these
Q4) What is a yield maintenance charge?
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Chapter 25: Market for Asset-Backed Securities
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Q1) Name three of the four principal reasons as to why a corporation may elect to raise funds via a securitization rather than a corporate bond.
Q2) There are three general categories of credit cards. Which of the below is NOT one of these categories?
A) general-purpose credit cards
B) independent networks
C) public-label credit cards
D) private-label credit cards
Q3) Securitization has resulted in financial disintermediation.
A)True
B)False
Q4) Evaluating asset risks involves the analysis of the credit quality of the collateral and consider s the underlying borrower's ability to pay but not the borrower's equity in the asset.
A)True
B)False
Q5) The assets that are securitized can have a fixed rate or a floating rate, which in turn impacts the structure in terms of the coupon rate for the bonds issued. Illustrate this.
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Chapter 26: Financial Futures Markets
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Q1) In regards to single stock futures contracts, which of the below statements is FALSE?
A) Single stock futures are equity futures in which the underlying is the stock of an individual company.
B) Single stock futures are traded on two exchanges: OneChicago and Nasdaq Liffe Markets (NQLX).
C) Single stock futures of only actively traded New York Stock Exchange and Nasdaq stocks are traded.
D) Futures exchanges have found that there are investors who want to take long and short positions in the futures market for a group of stocks and do so by paying for several trades.
Q2) Associated with most futures exchange is a clearinghouse, which provides a guarantee function.
A)True B)False
Q3) Futures contracts are leveraged instruments that can be used to control risk.
A)True
B)False
Q4) What is a forward contract? How does it differ from a futures contract?
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Chapter 27: Options Markets
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Q1) What is the dollar value of the S&P 100 contract if the multiple for the S&P 100 Stock Index is $100 and the cash index value for the S&P 100 is 620?
A) $60,000
B) $62,000
C) $64,000
D) None of these
Q2) Which of the below statements is TRUE?
A) In the case of a futures contract, the buyer of the contract realizes a dollar-for-dollar loss when the price of the futures contract increases.
B) The maximum profit that the writer (seller) of an option may realize is the option price; this is offset against substantial downside risk.
C) In the case of a futures contract, the buyer of the contract suffers a dollar-for-dollar loss when the price of the futures contract rises.
D) The risk/reward characteristics of a futures contract and an option contract are identical.
Q3) Comment on the differences between futures and options contracts.
Q4) Differentiate between a call option and a put option.
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Chapter 28: Pricing of Futures and Options Contracts
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Q1) You borrow $200 at 10% per year and proceed to buy Asset XYZ for $200 in the cash market. This asset pays $5 quarterly. You then immediately sell a futures contract at $214 requiring delivery of asset XYZ in three months. Which of the below statements is TRUE?
A) At the end of three month, the settlement of the futures contract generates a total proceeds of $220.
B) At the end of three month, the cost of the loan generates a total outlay of $206
C) Your strategy of selling the futures contract after borrowing money to buy the asset produces a net profit of $15.
D) None of these
Q2) If the strike or exercise price for a put option is $75, and the current asset price is $75, and the market value of the put option is $77. What is the time premium of the put option?
A) $7
B) $2
C) $1
D) zero
Q3) What do we assume when we illustrate arbitrage strategies?
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Chapter 29: The Applications of Futures and Options Contracts
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Q1) Which of the below statements is TRUE?
A) Stock options cannot be used to take advantage of the anticipated price movement of individual stocks.
B) An investor can protect against a decline in the price of a stock in her portfolio by buying a call option on that stock.
C) By taking an appropriate position in a suitable stock index option, an institutional investor can create a protective put for part of the diversified portfolio.
D) A protective put buying strategy allows an investor to protect against a decline in the price of a stock in her portfolio by buying a put option on that stock.
Q2) A long hedge is also known as a buy hedge.
A)True B)False
Q3) Institutional investors can use stock index futures for seven distinct investment strategies. Name four of these strategies.
Q4) Market participants can use interest rate futures in various ways. Name three of these ways.
Q5) Explain how a "protective put buying strategy" works.
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Chapter 30: OTC Interest Rate Derivatives: Forward Rate
Agreements, Swaps, Caps, and Floors
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Q1) The ________ is the value of the reference rate at the FRA's settlement date.
A) notional rate
B) going rate
C) contract rate
D) settlement rate
Q2) In comparing a swap to a futures or forward contract where the underlying is an interest rate instrument such as a Eurodollar CD, which of the below statements is FALSE?
A) The long futures position gains if interest rates decline and loses if interest rates risethis is similar to the risk/return profile for a floating-rate payer.
B) The risk/return profile for a fixed-rate payer is similar to that of the short futures position: a gain if interest rates increase and a loss if interest rates decrease.
C) Interest rate swaps can be viewed as a package of more basic interest rate control tools, such as forwards.
D) The pricing of an interest rate swap will then depend on the price of a package of forward contracts with the same settlement dates and in which the underlying for the forward contract is the same contract rate.
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Chapter 31: Market for Credit Risk Transfer Vehicles: Credit
Derivatives and Collateralized Debt Obligations
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Q1) In determining whether or not to create a CDO, dealers will look to see if there is a potential return available to the equity tranche of ________.
A) a minimum amount.
B) a maximum amount.
C) an interest-free amount.
D) a perfect amount.
Q2) Which of the below statements is FALSE?
A) In the absence of a credit event, the protection buyer will make a quarterly swap premium payment over the life of the swap.
B) If a credit event occurs, there are no further payments of the swap premium by the protection buyer to the protection seller.
C) If a credit event occurs, a termination value is determined for the swap.
D) With physical settlement the protection seller delivers a specified amount of the face value of bonds of the reference entity to the protection buyer.
Q3) What is credit-linked note (CLN)? Can it be complicated?
Q4) What can a CRT vehicle result in? Explain by commenting on the concern with the banking system.
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Chapter 32: The Market for Foreign Exchange and Risk
Control Instruments
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Q1) The birth of the euro was smooth and uneventful in terms of both market volatility and operations.
A)True
B)False
Q2) A key factor affecting the expectation of changes in a country's exchange rate with another currency is the relative ________ of the two countries.
A) known inflation rate
B) known purchasing power
C) expected inflation rate
D) expected risk-free rate
Q3) How do we mathematically express interest rate parity? In your answer describe all relevant variables.
Q4) The arbitrage process that forces interest rate parity is called ________.
A) uncovered interest parity.
B) covered dividend arbitrage.
C) covered interest arbitrage.
D) covered interest parity.
Q5) Contrast what a currency option contract gives compared to a forward or futures contract. What is the option price?
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