International Financial Markets
Textbook Exam Questions
Course Introduction
International Financial Markets explores the structure, operation, and regulation of financial markets across the globe. The course examines the roles of foreign exchange, international banking, and global capital markets, as well as the instruments and mechanisms that facilitate cross-border investment and financing. Students will analyze the impact of macroeconomic policies, exchange rate regimes, risk management strategies, and financial crises on market stability and efficiency. Emphasis is placed on understanding the interconnections among international financial institutions, regulatory environments, and the strategies employed by multinational corporations in a dynamic global economy.
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) The market stability regulator would take on the traditional role of the Federal Reserve by giving it the responsibility and authority to ensure overall financial market stability.
A)True
B)False
Answer: True
Q2) The regulatory structure in the United States is largely the result of ________.
A) the first IPO bubble in the 20th century.
B) the boom in the stock market experienced in the 1990s.
C) bull markets that have occurred at various times.
D) financial crises that have occurred at various times.
Answer: D
Q3) One economic function of a financial market is to reduce the cost of transacting. There are two costs associated with transacting: search costs and information costs.
A)True
B)False
Answer: True
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Chapter 2: Financial Institutions, Financial Intermediaries, and Asset Management Firms
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Q1) Because of uncertainty about the timing and/or the amount of the cash outlays, a financial institution must be prepared ________.
A) to have sufficient cash to satisfy its obligations.
B) to have sufficient projects to satisfy its capital budget constraints.
C) to have sufficient risk to satisfy its obligations.
D) to have sufficient risk to satisfy its conservative investors.
Answer: A
Q2) There is no universally accepted definition to describe the 9,000 privately pooled investment entities in the United States called ________ that invest more than $1.3 trillion in assets.
A) derivative funds
B) option funds
C) hedge funds
D) asset/liability funds
Answer: C
Q3) Name three of the five types of funds managed by asset management firms.
Answer: Types of funds managed by asset management firms include:regulated investment companies; insurance company funds; separately managed accounts for individuals and institutional investors; pension funds; and hedge funds.
Page 4
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Chapter 3: Depository Institutions: Activities and Characteristics
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Q1) Which of the below statements is TRUE?
A) A depository institution seeks to earn a positive spread between the assets it invests in (deposits and other sources) and the cost of its funds (loans and securities).
B) Interest rate risk refers to the risk that a borrower will default on a loan obligation to the depository institution or that the issuer of a security that the depository institution holds will default on its obligation
C) Regulatory risk is the risk that regulators will change the rules so as to adversely impact the earnings of the institution.
D) If the spread will be positive, it will cost the depository institution more to finance the government securities than it will earn on the funds invested in those securities.
Answer: C
Q2) 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
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Page 5
Chapter 4: The US Federal Reserve and the Creation of Money
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Q1) Which of the below statements is FALSE?
A) Interest rates do not influence the change in the money supply.
B) If banks were to keep some excess reserves, they would make fewer new loans and generate fewer deposits at other banks, which would affect the amount of M that the Fed's purchase of securities would generate.
C) One of the important factors in a bank's decisions about excess reserves is the level of market interest rates.
D) The level of market rates shapes decisions about cash holdings.
Q2) One of the major ways a central bank accomplishes its goals is through monetary policy. For this reason, a central bank is sometimes referred to as a ________.
A) financial authority
B) treasury authority
C) bank authority
D) monetary authority
Q3) The most basic monetary aggregate is the fiscal base.
A)True
B)False
Q4) Describe the meaning of the word money.
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Chapter 5: Monetary Policy in the United States
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Q1) The Fed can be certain how much impact any change in reserves will have on short-term rates.
A)True
B)False
Q2) Overall, according to the Keynesian view of the economy, a ________ in the fed funds rate should lead to a(n) ________ level of output and employment in the economy.
A) decline; lower
B) rise; higher
C) decline; unknown
D) None of these
Q3) During March 2008, there were surprisingly no concerns that a bankruptcy of Bear Stearns was imminent.
A)True
B)False
Q4) Discuss two problems that the Fed has in implementing monetary policy.
Q5) A "weak" dollar contributes to inflation, as U.S. buyers pay more for the many goods they do import.
A)True
B)False
Page 7
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Chapter 6: Insurance Companies
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Q1) 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)
Q2) The credit rating of an insurance company is important to a purchaser of insurance, especially for the types of insurance that may be paid well into the future, such as health insurance.
A)True
B)False
Q3) In 1933, Congress passed the Glass-Steagall Act. Trace the history of this act through the 20th century.
Q4) For ________, the risk insured against is the death of the "insured."
A) life insurance
B) health insurance
C) property insurance
D) automobile insurance
Page 8
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Chapter 7: Investment Companies and Exchange Traded Funds
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Q1) The Investment Company Institute (ICI) provides data that permit the assessment of investors to the annual expense sales including the sales charge or load.
A)True
B)False
Q2) There is often a difference between the NAV of a ________ underlying portfolios and the price of its funds that are bought and sold. This difference is called a ________ when the price is greater than the NAV.
A) opened-end fund's; discount
B) mutual fund's; premium
C) closed-end fund's; premium
D) mutual fund's; discount
Q3) An important feature of the '40 Act exempts any company that qualifies as a "regulated investment company" (RIC) from taxation on its gains, either from income or capital appreciation, as previously indicated. How does a fund qualify as a RIC?
Q4) There are important aspects of open-end funds, commonly referred to simply as mutual funds. Describe three of these aspects.
Q5) What are variable annuities?
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Chapter 8: Pension Funds
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Q1) Explain the "prudent man" concept.
Q2) In a ________, the plan sponsor agrees to make specified dollar payments annually to qualifying employees beginning at retirement (and some payments to beneficiaries in case of death before retirement).
A) defined-benefit plan
B) cash balance plan
C) defined-balance plans
D) defined-contribution plans
Q3) Which of the below statements is TRUE?
A) An insured plan is always safer than a noninsured plan.
B) A federal agency, the Pension Benefit Guaranty Corporation (PBGC) does not insure the vested benefits of participants.
C) Defined benefit plans that are guaranteed by life insurance products are called insured benefit plans.
D) A plan sponsor establishing a defined-benefit plan cannot use the payments made into the fund to purchase an annuity policy from a life insurance company.
Q4) Explain the difference between a defined-benefit pension plan and a defined-contribution pension plan.
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Page 10
Chapter 9: Properties and Pricing of Financial Assets
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Q1) The return that an investor will realize by holding a financial asset depends on all the ________ that the financial asset will pay its owners; this includes dividends on shares and coupon payments on bonds.
A) stock distributions
B) cash distributions
C) cash convertibility
D) liquid inventories
Q2) Which of the below is NOT one of the eleven properties of financial assets?
A) moneyness
B) multiplicity and denomination
C) reversibility
D) cash flow
Q3) When we refer to changes in the required yield, it is convenient to measure a change in yield in terms of what market participants refer to as ________.
A) a basis modification rather than a yield modification.
B) a yield modification rather than in terms of a basis modification.
C) a percentage change rather than a basis point.
D) a basis point rather than in terms of a percentage change.
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Chapter 10: The Level and Structure of Interest Rates
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Q1) Which of the below statements about consumptions and savings is FALSE?
A) A chief influence on the saving decision is the individual's marginal rate of time preference, which is the willingness to trade some consumption now for more future consumption.
B) Generally, higher current income means the person will save more, although people with the same income may have different time preferences.
C) A variable affecting savings is the reward for saving, or the rate of interest on loans that savers make with their unconsumed income.
D) The total savings (or the total supply of loans) available at any time is the sum of everybody's savings and a negative function of the interest rate.
Q2) One would expect that if a country has a government bond market, the yields in that market would be the best benchmark. That is not necessarily the case. There are several advantages of using a swap curve over a country's government securities yield curve. Explain ONE of these advantages.
Q3) Explain the distinction between the real rate of interest and the nominal rate of interest.
Q4) Explain what is meant by the liquidity effect.
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Page 12
Chapter 11: The Term Structure of Interest Rates
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Q1) There is a drawback to the pure expectations theory in that it does not consider the risks associated with investing in bonds. Nonetheless, there is risk in holding a long-term bond for one period, and that risk increases with the bond's maturity because maturity and price volatility are directly related. Given this uncertainty, and the reasonable consideration that investors typically do not like uncertainty, some economists and financial analysts have suggested a different theory. What is this theory and explain its relevance including its suggestions about implicit forward rates and yield curve.
Q2) Given the spot rates, the theoretical value of a bond can be calculated.
A)True
B)False
Q3) To determine the value of each zero-coupon instrument, it is necessary to know the yield on a corporate bond with that same maturity.
A)True
B)False
Q4) 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
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Page 13
Chapter 12: Risk/Return and Asset Pricing Models
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Q1) What is the return on a portfolio on a portfolio if the portfolio market value at the beginning of the interval is $1,350, the portfolio market value at the end of the interval is $1,185, and the cash distributions to the investor during the interval is $115.52?
A) 12.85%
B) 5.24%
C) -1.78%
D) -3.67%
Q2) We can distinguish between a security's ________, which can be washed away by mixing the security with other securities in a diversified portfolio, and its ________, which cannot be eliminated by diversification.
A) systematic risk; unsystematic risk
B) portfolio risk; systematic risk
C) unsystematic risk; T-Bill risk
D) unsystematic risk; systematic risk
Q3) Explain how diversification can help investors realize their investment goal of maximizing return while minimizing risk. In your answer give an estimate of how many stocks are needed to achieve your investment goal.
Q4) Describe the multifactor CAPM and how it extends the CAPM.
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Page 14
Chapter 13: Primary Markets and the Underwriting of Securities
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Q1) In April 1990, the SEC Rule 144A became effective and ________.
A) eliminated the five-year holding period by permitting large institutions to trade securities acquired in a private placement among themselves by registering these securities with the SEC.
B) eliminated the two-year holding period by disallowing large institutions to trade securities acquired in a private placement among themselves without having to register these securities with the SEC.
C) eliminated the two-year holding period by permitting large institutions to trade securities acquired in a private placement among themselves without having to register these securities with the SEC.
D) added the two-year holding period by permitting small institutions to trade securities acquired in a public placement among themselves without having to register these securities with the SEC.
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
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Chapter 14: Secondary Markets
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Q1) A dealer acts as an auctioneer in all market structures, thereby providing order and fairness in the operations of the market.
A)True
B)False
Q2) In a call market, the auction may be oral but not written.
A)True
B)False
Q3) This practice of selling securities that are not owned at the time of sale is referred to as ________.
A) buying short.
B) selling short.
C) selling long.
D) buying and selling simultaneously.
Q4) The same Wall Street firms that have been the major market makers in bonds have also been the ________ of electronic trading in bonds.
A) cynics
B) attackers
C) supporters
D) detractors
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Chapter 15: Treasury and Agency Securities Markets
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Q1) The Treasury does not issue zero-coupon notes or bonds.
A)True
B)False
Q2) Unlike primary dealers, ________ had to make large cash deposits or provide guarantees to ensure that they could fulfill their obligation to purchase the securities for which they bid.
A) nonprimary dealers
B) recognized dealers
C) reporting dealers
D) All of these
Q3) Sovereign debt is the obligation of a country's central government.
A)True
B)False
Q4) The index-linked gilts offered by the British government have coupons and final redemption amounts linked to the General Index of Retail Price (RPI), an index which is released each month by the Central Statistical Office.
A)True
B)False
Q5) Describe two types of government-chartered entities.
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Chapter 16: Municipal Securities Markets
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Q1) Which of the below statements is FALSE?
A) Municipal bonds are issued with one of two debt retirement structures or a combination of both.
B) A serial maturity structure requires a portion of the debt obligation to be retired each year.
C) A provision that permits the early redemption of a term bond is the call privilege.
D) None of these
Q2) To evaluate general obligation bonds, the commercial rating companies assess information in four basic categories including ________.
A) information necessary to the credit analysis is an assessment of the issuer's overall socioeconomic environment.
B) information on the issuer's debt structure and overall debt burden.
C) the issuer's ability and political discipline to maintain sound budgetary policy.
D) All of these
Q3) What is The Bond Buyer.
Q4) Contrast the yield on municipal bonds with that on Treasuries.
Q5) Cite two reasons for the exemption afforded municipal securities.
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18
Chapter 17: Markets for Common Stock: The Basic
Characteristics
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Q1) Which of the below statements is FALSE?
A) The growth of mutual fund sales and massive equity investments by pension funds and insurance companies during the 1990s have all given an impetus to such methods to trade baskets or bundles of stocks efficiently.
B) Program trading is used for a strategy called index arbitrage.
C) Several commission arrangements are available to an institution for a program trade, and each arrangement has numerous variants.
D) From a dealer's perspective, program trades can be conducted in only one way and this on a principal basis.
Q2) The ________ is a conditional order and is executed only if the limit price or a better price can be obtained. Another type of conditional order is the ________, which specifies that the order is not to be executed until the market moves to a designated price, at which time it becomes a ________.
A) limit order; stop order; market order
B) stop order; limit order; market order
C) limit order; market order; stop order
D) market order; stop order; limit order
Q3) Name and describe the three different forms of pricing efficiency.
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Chapter 18: Markets for Common Stock: Structure and Organization
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Q1) Specialists are also responsible for balancing buy and sell orders at the opening of the trading day in order to arrange an equitable opening price for the stock.
A)True
B)False
Q2) Which of the below statements is TRUE?
A) Overall, non-intermediated, quote-driven markets may be less costly due to the absence of profit-seeking dealers.
B) The Nasdaq is primarily a continuous auction order-driven system based on customer orders but the specialists enhance the liquidity by their market-making to maintain a fair and orderly market.
C) The NYSE is a continuous market during the trading day and a call auction market to open and close the market and to reopen after a stop in trading. Thus, the NYSE is not a hybrid market.
D) Nasdaq (an acronym for the National Association of Securities Dealers Automated Quotations System) began as a descendant of the OTC dealer network, and is a dealer quote-driven market.
Q3) Describe the tasks of a NYSE specialist.
Q4) What is a dark pool? Describe two of the sponsors of dark pools.
Page 20
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Chapter 19: Markets for Corporate Senior Instruments: I
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Q1) Commercial paper is an alternative to bank borrowing for small bank holding companies.
A)True
B)False
Q2) Commercial paper ________.
A) is a long-term unsecured promissory note issued in the open market that represents the obligation of the issuing corporation.
B) is an alternative to bank borrowing for small firms with strong credit ratings.
C) has never been used quite often for bridge financing.
D) has very little secondary trading.
Q3) Traditionally credit risk is defined as the risk that the borrower will fail to satisfy the terms of the obligation with respect to the timely payment of interest and repayment of the amount borrowed. This form of credit risk is called ________.
A) spread risk.
B) market risk.
C) payment risk.
D) default risk.
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Chapter 20: Markets for Corporate Senior Instruments: II
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Q1) The major issuers of adjustable-rate preferred stock (ARPS) have been bank holding companies. There are two reasons bank holding companies have become major issuers of ARPS. Describe these two reasons.
Q2) In assessing the credit risk of a corporate issuer, the rating agencies never look at the protections afforded to debt holders that are provided by covenants limiting management's discretion.
A)True
B)False
Q3) In assessing management quality, Moody's tries to understand the business strategies and policies formulated by investors.
A)True
B)False
Q4) By senior corporate securities, we mean that the holder of the senior security has priority over the ________.
A) secured debt owners in the case of bankruptcy of a corporation.
B) all other senior debt owners in the case of restructuring of a corporation.
C) equity owners in the case of voting rights.
D) equity owners in the case of bankruptcy of a corporation.
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Page 22
Chapter 21: The Markets for Bank Obligations
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Q1) Foreign banks are by far the largest holders of federal funds, with most transactions involving fed funds lasting for only one night.
A)True B)False
Q2) The rate determined in the federal funds market is the major factor that influences the rate paid on all other private money market instruments.
A)True B)False
Q3) The maturities for the Eurodollar CD range from overnight to five years.
A)True B)False
Q4) A bank may sell its bankers acceptances directly to investors, or may sell all or part to dealers.
A)True B)False
Q5) The yields posted on CDs vary depending on three factors. Name these three factors.
Q6) Investing in bankers acceptances exposes the investor to credit risk. Describe this risk.
Page 23
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Chapter 22: The Residential Mortgage Market
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Q1) Conventional loans in the market are referred to as conforming conventional loans and nonconforming conventional loans.
A)True
B)False
Q2) ________ is the risk that the homeowner/borrower will default.
A) Price risk
B) Liquidity risk
C) Credit risk
D) All of these
Q3) Fannie Mae and Freddie Mac can buy or sell any type of ________, but the mortgages that are packaged into securities are restricted to ________ and those that satisfy their underwriting guidelines.
A) commercial mortgage; corporate loans
B) residential mortgage; government loans
C) commercial mortgage; government loans
D) residential mortgage; corporate loans
Q4) Is prepayment risk like that faced by a bond investor? Discuss.
Q5) The two primary quantitative underwriting standards are (1) the payment-to-income ratio (PTI), and (2) the loan-to-value ratio (LTV). Describe these two ratios.
24
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Chapter 23: Mortgage-Backed Securities Market
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Q1) The residential mortgage market can be divided into two subsectors based on the credit quality of the borrower: private label mortgage market and subprime mortgage market. Describe the loans for these two subsectors.
Q2) In a CMO structure, there is one bond class called a branch.
A)True
B)False
Q3) Of the mortgage pass-through securities guaranteed by one of the three agencies, only those guaranteed by Ginnie Mae carry the full faith and credit of the U.S. government; nonagency pass-through securities are rated by a commercial rating company, and often they are supported by credit enhancements so that they can obtain a high rating.
A)True
B)False
Q4) Just like a support bond, a CMO reduces the uncertainty concerning the maturity of a tranche, thereby providing a risk/return pattern not available with typical mortgage pass-through securities.
A)True
B)False
Q5) What is an IO?
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Chapter 24: Market for Commercial Mortgage Loans and Commercial Mortgage-Backed Securities
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Q1) CMBS are backed by either newly originated or seasoned commercial mortgage loans.
A)True
B)False
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) CMBS ________.
A) are backed by seasoned commercial mortgage loans.
B) are backed by newly originated loans.
C) can be backed by a single borrower.
D) All of these
Q4) Describe some main features of a commercial loan.
Q5) As with a nonagency RMBS, a servicer is required. Name three responsibilities of a servicer.
Q6) Are CMBS and nonagency RMBS structures similar or different? Discuss. Page 26
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Chapter 25: Market for Asset-Backed Securities
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Q1) Which of the below statements is FALSE?
A) Securitization is a vehicle for raising funds directly in the public market without the need for a financial intermediary.
B) Securitization reduces risk via diversification.
C) The costs of contracting and information processing are provided in asset securitization.
D) The concerns with the financial disintermediating impact of securitization are that more assets will be held in the portfolio of banks.
Q2) Securitization is a vehicle for raising funds directly in the public market without the need for a financial ________. That is, securitization is said to result in ________.
A) liaison; accounting discrimination
B) advisor; accounting disintermediation
C) go-between; financial interpretation
D) intermediary; financial disintermediation
Q3) What is the key benefit of securitization to financial markets?
Q4) All loans must be serviced. What does servicing involve? What is the servicer responsible for?
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Chapter 26: Financial Futures Markets
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Q1) ________ are standardized agreements as to the delivery date (or month) and quality of the deliverable, and are traded on organized exchanges, while ________ is usually nonstandardized because the terms of each contract are negotiated individually between buyer and seller.
A) Futures contracts; a forward contract
B) Standardized contracts; a nonstandarized contract
C) Futures contracts; a nonstandarized contract
D) Standardized contracts; a futures contract
Q2) A futures contract is an agreement between a buyer and a seller in which the buyer agrees to take delivery of something at the futures price at the settlement date and the seller agrees to make delivery.
A)True
B)False
Q3) An exchange has the right to impose a limit on the daily price movement of a futures contract from the previous day's closing price.Explain why such a right might be needed.
Q4) What is a forward contract? How does it differ from a futures contract?
Q5) Describe a Eurodollar futures contract. Illustrate the minimum price fluctuation for this contract.
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Chapter 27: Options Markets
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Q1) The profit and loss profile of the short call position (that is, the position of the call option writer) is the ________ the profit and loss profile of the long call position (the position of the call option buyer).
A) same as
B) the identical image of
C) mirror image of
D) All of these
Q2) In the case of a ________, both buyer and seller are obligated to perform.
A) call option contract
B) put option contract
C) futures contract
D) All of these
Q3) An American option, also referred to as an Atlantic option, can be exercised only on specified dates.
A)True
B)False
Q4) Options allow the investor to mold a risk/return relationship.
A)True
B)False
Q5) Comment on the differences between futures and options contracts.
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Chapter 28: Pricing of Futures and Options Contracts
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Q1) The ________ of an option, at any time, is its economic value if it is exercised immediately. If no positive economic value would result from exercising immediately,
A) extrinsic value; extrinsic value is zero.
B) intrinsic value; intrinsic value is zero.
C) extrinsic value; intrinsic value is negative.
D) intrinsic value; intrinsic value is positive.
Q2) 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
Q3) Describe an option when (i) in the money and (ii) out of the money.
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Chapter 29: The Applications of Futures and Options Contracts
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Q1) An institutional investor can create a put option synthetically by using either
A) stocks or a riskless asset.
B) stock index futures or stocks.
C) stock index futures or a riskless asset.
D) stock index futures or stocks and a riskless asset.
Q2) An institutional investor can use interest rate options or options on interest rate futures to speculate on ________ based on expectations of interest rate changes.
A) flexible-income security price movements
B) fixed-income security price movements
C) common stock price movements
D) None of these
Q3) In a ________, the objective is to alter a current or anticipated stock portfolio position so that its ________ is zero.
A) hedging strategy; beta
B) speculative strategy; standard deviation
C) diversified strategy; beta
D) nondiversified strategy; standard deviation
Q4) 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) Which of the below statements is FALSE?
A) In an interest rate cap and floor, the buyer pays an upfront fee, which represents the maximum amount the buyer can lose and the maximum amount the writer of the agreement can gain.
B) The seller (writer) of an interest rate cap benefits if the underlying interest rate rises above the strike rate because the buyer must compensate the buyer.
C) In essence, interest rate caps and interest rate floors contracts are equivalent to a package of interest rate options.
D) The buyer of an interest rate floor benefits if the interest rate falls below the strike rate because the seller (writer) must compensate the buyer.
Q2) Suppose that for the next five years party X agrees to pay party Y 10% per year, while party Y agrees to pay party X six-month LIBOR (London Interbank Offered Rate). Party X is a fixed-rate payer / ________, while party Y is a floating-rate payer / ________.
A) fixed-rate receiver; fixed-rate receiver.
B) floating-rate receiver; fixed-rate receiver.
C) floating-rate receiver; floating-rate receiver.
D) floating-rate payer; fixed-rate payer.
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Page 33
Chapter 31: Market for Credit Risk Transfer Vehicles: Credit
Derivatives and Collateralized Debt Obligations
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Q1) What is credit-linked note (CLN)? Can it be complicated?
Q2) Credit derivatives are used by institutional portfolio managers to more efficiently control the credit risk of a portfolio rather than the balance sheet of a financial institution.
A)True
B)False
Q3) Which of the below statements is FALSE?
A) If a credit event occurs that requires a payout, the collateral manager must make a payment to the protection buyer.
B) There are now standard synthetic CDO tranches that can be purchased by investors based on a standardized reference portfolio.
C) The motivation in a balance sheet transaction is to retain loans on a financial institution's balance sheet and obtain capital relief.
D) A synthetic CDO uses credit derivatives, most commonly credit default swaps, to create exposure to reference entities rather than purchasing the cash instruments of those reference entities themselves.
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) A ________ in the foreign exchange market leads arbitrageurs to act, with the result that the forward exchange rate changes.
A) riskless and uncertain arbitrage situation
B) risky arbitrage situation
C) risky opportunity possibility
D) riskless arbitrage situation
Q2) If the number of units of a foreign currency that can be obtained for one dollar (the price of a dollar in that currency or indirect quotation) rises, the dollar is said to ________ relative to the currency, and the currency is said to ________. Thus, appreciation means a decline in the ________ quotation.
A) appreciate; depreciate; direct
B) depreciate; appreciate; indirect.
C) appreciate; depreciate; direct,
D) depreciate; appreciate; indirect.,
Q3) What is a key factor affecting the expectation of changes in a country's exchange rate with another currency? Explain in terms of the purchasing power parity relationship?
Q4) Contrast what a currency option contract gives compared to a forward or futures contract. What is the option price?
Page 35
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