Introduction to Finance
Mock Exam
Course Introduction
Introduction to Finance provides students with a foundational understanding of financial concepts and the role finance plays in business and personal decision-making. The course covers key topics such as the time value of money, risk and return, financial markets and institutions, valuation of assets, and basic financial statement analysis. Through practical examples and real-world applications, students will learn how individuals and organizations make informed financial decisions, evaluate investment opportunities, and manage resources effectively to achieve financial goals. This course serves as a stepping stone for more advanced studies in finance and related disciplines.
Recommended Textbook
Foundations of Financial Markets and Institutions 4th Edition by Frank J. Fabozzi
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1746 Verified Questions
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Chapter 1: Introduction
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Q1) Financial markets can be categorized as those dealing with newly issued financial claims that are called the ________, and those for exchanging financial claims previously issued that are called the ________.
A) secondary market; primary market.
B) financial market; secondary market.
C) OTC market; NYSE/AMEX market.
D) primary market; secondary market.
Answer: D
Q2) The two basic types of derivative instruments are ________ and ________.
A) insurance contracts; options contracts
B) futures/forward contracts; indentures
C) futures/forward contracts; legal contracts
D) futures/forward contracts; options contracts
Answer: D
Q3) Financial assets have two principal economic functions. One function is to transfer funds from those who have surplus funds to invest to those who need funds to invest in tangible assets.
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) Hedge funds use a wide range of trading strategies and techniques in an attempt to earn superior returns.
A)True
B)False
Answer: True
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) 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.
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Chapter 3: Depository Institutions: Activities and Characteristics
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Q1) What is a corporate credit union?
Answer: One might think that a corporate credit union is a credit union set up by employees of a corporation. It is not. Federal and state-chartered credit unions are referred to as "natural person" credit unions because they provide financial services to qualifying members of the general public. In contrast, corporate credit unions provide a variety of investment services, as well as payment systems, only to natural person credit unions. Almost all corporate credit unions are federally insured. The U.S. Central Credit Union acts as the chief liquidity center for corporate credit unions by investing surplus funds from the other corporate credit unions.
Q2) The three sources of funds for banks are ________.
A) salaries, nondeposit borrowing, common stock, and retained earnings.
B) deposits, nondeposit borrowing, common stock, and retained earnings.
C) deposits, salaries and wages, common stock, and retained earnings.
D) deposit borrowing, bonds, and retained earnings.
Answer: B
Q3) Savings banks are institutions similar to, although much younger than, S&Ls.
A)True
B)False
Answer: False
Page 5
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Chapter 4: The US Federal Reserve and the Creation of Money
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Q1) Shifts in the dollar's exchange rates affects which of the below?
A) It affects the prices of domestic and imported goods.
B) It affects the revenues of U.S. companies.
C) It affects the wealth of all investors in the country.
D) All of these
Q2) Created in 1913, the ________ is the government agency responsible for the management of the U.S. monetary and banking systems.
A) Board of Governors
B) European Central Bank
C) Fed
D) Group of 8
Q3) If the Fed thinks the dollar's value is ________ and a foreign currency's is too low, it can purchase some of the foreign currency with its own supply of dollars.
A) excessively undervalued
B) a fair value
C) too high
D) too low
Q4) Briefly discuss the nature of a closed economy and an open economy.
Q5) Describe the Federal Reserve System and its important feature.
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Chapter 5: Monetary Policy in the United States
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Q1) The Fed cannot, with any of its monetary tools (open market operations, discount rates, etc.), directly influence such complex economic variables as ________.
A) the prices of goods and services
B) the unemployment rate
C) the growth in gross domestic product
D) All of these
Q2) Identify and briefly describe three of the major goals of Fed policy.
Q3) The Fed can be certain how much impact any change in reserves will have on short-term rates.
A)True
B)False
Q4) Bernanke became chairman during the final 25 basis point increases in the Fed funds rate to 5.25% on June 29, 2006, and maintained this rate through the remainder of 2006 and the first half of 2007.
A)True
B)False
Q5) In the Keynesian view, the Fed's decision to reduce the fed funds rate, by increasing the banking system's excess reserves, should have certain consequences. Explain these consequences.
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Chapter 6: Insurance Companies
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Q1) Describe and contrast the various types of IRAs.
Q2) Name some major differences in (a) the portfolios of life companies and P&C companies, and (b) investment strategy between public (or stock) and mutual insurance companies of the same type.
Q3) Which of the below is TRUE of whole life insurance?
A) The actuarial cost of pure insurance increases with age, but the premium charged on whole life insurance decreases.
B) Whole life insurance builds up a cash value that can be withdrawn and can also be borrowed against by the owner of the policy.
C) A major disadvantage of whole life insurance is that the inside buildup is subject to taxation.
D) The death benefit of the whole life insurance policy is always subject to estate tax.
Q4) Globalization has occurred in many industries, but not in the insurance industry.
A)True
B)False
Q5) Explain survivorship insurance or second-to-die insurance.
Q6) Name and briefly describe four major types of insurance.
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Page 8
Chapter 7: Investment Companies and Exchange Traded Funds
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Q1) The major alternatives to mutual funds are ________.
A) exchange-traded funds.
B) segregated accounts.
C) "folios."
D) All of these
Q2) Due to the success of mutual funds, investment companies have had no need to develop alternatives to mutual funds.
A)True
B)False
Q3) Mutual fund investors can control the size of the capital gains distributions and, as a result, the timing and amount of the taxes paid on their fund holdings is controlled.
A)True
B)False
Q4) There are important aspects of open-end funds, commonly referred to simply as mutual funds. Describe three of these aspects.
Q5) New investors in a mutual fund may assume a tax liability even though they have no gains. Explain how this is accomplished.
Q6) What are variable annuities?
Page 9
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Chapter 8: Pension Funds
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Q1) A study by Zion and Carcache of Credit Suisse First Boston estimated that if the companies included in the Standard & Poor's 500 index had replaced the ROA projections for their pension plans with the plans' actual performance, the companies' aggregate reported earnings would have ________.
A) increased greatly.
B) increased moderately.
C) declined.
D) remained the same.
Q2) The ________ enables employees to obtain more investment advice for their employers by removing the fiduciary liability based on the perceived conflict of interest of self-interested investment advice provided by the employer.
A) Employee Retirement Income Security Act (ERISA) of 1974
B) Pension Benefit Guaranty Corporation (PBGC) established in 1974
C) Social Security Benefit Act of 1935
D) Pension Protection Act of 2006 (PPA)
Q3) Explain the difference between a defined-benefit pension plan and a defined-contribution pension plan.
Q4) Describe the essence of a qualified fund.
Q5) Explain the "prudent man" concept.
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Chapter 9: Properties and Pricing of Financial Assets
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Q1) The price of a complex asset is the sum of the prices of its component parts.
A)True
B)False
Q2) Approximate percentage change in a financial asset's price equals what?
A) It equals -Duration x (Yield change in decimal forms) x 100.
B) It equals [-Duration / (Yield change in decimal forms)] x 100.
C) It equals -Duration x [(Yield change in decimal forms) / 100].
D) It equals +Duration x (Yield change in decimal forms) x 100.
Q3) The correct price for a financial asset can be expressed as follows: \(P=\frac{C F_{1}}{(1+r)^{1}}+\frac{C F_{2}}{(1+r)^{2}}+\frac{C F_{3}}{(1+r)^{3}}+\frac{C F_{N}}{(1+r)^{N}} \text { where }\)_________
A) P = the price of the cash flow
B) CFt = the financial asset in year t (t = 1, ,N)
C) N = the maturity of the financial asset
D) r = the appropriate cash rate
Q4) A financial asset has many properties, and each affects the asset's value in a similar and important way.
A)True
B)False
Page 11
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Chapter 10: The Level and Structure of Interest Rates
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Q1) The ________, originally developed by John Maynard Keynes, analyzes the equilibrium level of the interest rate through the interaction of the supply of money and the public's aggregate demand for holding money.
A) loanable funds theory of interest rates
B) expectation theory of interest rates
C) liquidity preference theory
D) Fisher theory
Q2) 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
Q3) Convertible bonds are securities issued by state and local governments and by their creations, such as "authorities" and special districts.
A)True
B)False
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Chapter 11: The Term Structure of Interest Rates
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Q1) Ilmanen investigated the effect of the behavior of ________ using historical average returns on U.S. Treasury securities.
A) the bond risk premium
B) the convexity bias
C) market's expectations
D) different maturities
Q2) Market participants have tended to construct yield curves from observations of prices and yields in the Treasury market. Two reasons account for this tendency. Which of the below is ONE of these reasons?
A) The smallest and most inactive bond market, the Treasury market offers the fewest problems of illiquidity or frequent trading
B) Treasury securities have a small amounts of default risk, and differences in creditworthiness do affect yield estimates.
C) The largest and most active bond market, the Treasury market offers the fewest problems of illiquidity or infrequent trading.
D) Treasury securities are full of default risk, and differences in creditworthiness do not affect yield estimates.
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Chapter 12: Risk/Return and Asset Pricing Models
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Q1) Which of the below statements is FALSE?
A) The major difficulty in testing the CAPM is that the model is stated in terms of investors' expectations and not in terms of realized returns.
B) The expected risk premium should be equal to the quantity of risk (as measured by beta) and the market price of risk (as measured by the expected market risk premium).
C) Empirical tests find a significant positive relationship between realized returns and systematic risk as measured by beta but the estimate of the average market risk premium is usually less than that predicted by the CAPM.
D) Empirical tests find evidence of significant curvature in the risk/return relationship.
Q2) The market model is the hypothesis that a security's return may be attributed to two forces, the returns on securities in general, and events related to the market itself.
A)True
B)False
Q3) Describe two of the three major results of the empirical tests conducted on relationship between return and systematic risk.
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Chapter 13: Primary Markets and the Underwriting of Securities
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Q1) An offering of a new security cannot be made by means of an auction process.
A)True
B)False
Q2) An investment banker may merely act as an advisor and/or distributor of the new security. The function of buying the securities from the issuer is called ________.
A) advising.
B) distributing.
C) purchasing.
D) underwriting.
Q3) What is the waiting period? What do underwriters do during the waiting period?
Q4) Because of the low risks associated with the underwriting of securities, an underwriting syndicate and a selling group are rarely formed.
A)True
B)False
Q5) A rights offering ensures that current shareholders may maintain their proportionate equity interest in the corporation.
A)True
B)False
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Chapter 14: Secondary Markets
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Q1) In the United States, secondary trading of common shares are traded on major national stock exchanges and regional stock exchanges, which are organized and somewhat regulated markets in specific geographical locations.
A)True
B)False
Q2) Which of the below statements is FALSE?
A) In a call market, a market maker holds an auction for a stock at certain times in the trading day (or possibly more than once in a day).
B) Many secondary markets are continuous, which means that prices are determined continuously throughout the trading day as buyers and sellers submit orders.
C) In a call market, a market maker holds an auction for a stock at the same time each day.
D) An auction in a call market may be oral or written.
Q3) In the United States, secondary trading of common stock occurs in a number of trading locations. Describe these locations.
Q4) Trace the historical evolution of transaction costs charged by the brokerage industry.
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Chapter 15: Treasury and Agency Securities Markets
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Q1) The GSEs issue debentures and mortgage-backed securities and these securities are backed by the full faith and credit of the U.S. government.
A)True
B)False
Q2) 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
Q3) The U.S. Department of the Treasury ________.
A) makes the determination of the procedure for auctioning new Treasury securities.
B) does not make the determination of when to auction new Treasury securities.
C) does not make the determination what maturities to issue.
D) all of these
Q4) What is the reason for distinguishing between local debt ratings and foreign currency debt ratings?
Q5) Describe two types of government-chartered entities.
Q6) Illustrate the process of stripping.
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Chapter 16: Municipal Securities Markets
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Questions
Q1) States and local governments can issue bonds where the debt service is to be paid from so-called "dedicated" revenues such as sales taxes, tobacco settlement payments, fees, and penalty payments. These structures, are called ________, and are also referred to as dedicated revenue bonds and structured bonds.
A) asset-backed bonds
B) public power revenue bonds
C) insured bonds
D) prerefunded bonds
Q2) The investor in a municipal security is not exposed to credit risk.
A)True
B)False
Q3) The most common types of activities for taxable municipal bonds used for financing include ________.
A) local sports facilities and investor-led housing projects.
B) advanced refunding of issues that are not permitted to be refunded because the tax law prohibits such activity.
C) underfunded pension plan obligations of the municipality.
D) All of these
Q4) What is The Bond Buyer.
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Chapter 17: Markets for Common Stock: The Basic
Characteristics
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Q1) When an investor is calculating the return from holding common stock from the date of purchase to a given point in time and has sold the common stock, the return reflects an unrealized capital gain or unrealized capital loss.
A)True
B)False
Q2) Name and describe the three different forms of pricing efficiency.
Q3) ________ is the "cost" of securities not traded.
A) The sunk cost
B) The impact cost
C) The timing cost
D) The opportunity cost
Q4) In a ________ stop order, the designated price is ________ than the current market price of the stock, while in a ________ limit order, the designated price is ________ than the current market price of the stock.
A) buy; lower; buy; higher
B) sell; lower; buy; lower
C) sell; higher; buy; lower
D) sell; lower; sell; lower
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Chapter 18: Markets for Common Stock: Structure and Organization
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Q1) 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.
Q2) Among the advantages of dark pools are less or no visibility and no price discovery.
A)True
B)False
Q3) What does direct market access (DMA) refer to? Name two advantages of DMA to a buy-side firm?
Q4) Contrast the NYSE exchange with Nasdaq
Page 20
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Chapter 19: Markets for Corporate Senior Instruments: I
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Q1) 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.
Q2) Commercial paper is a secured promissory note that is issued in the open market and that represents the obligation of the issuing corporation.
A)True
B)False
Q3) A tax-oriented lease effectively allows the lessee to obtain a financing at less cost than by bank borrowing.
A)True
B)False
Q4) There are two possible ways for the lessor to finance the purchase of the equipment. Describe these two ways.
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21
Chapter 20: Markets for Corporate Senior Instruments: II
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Q1) Electronic bond trading makes up about 30% of corporate bond trading. Name three major advantages of electronic trading over traditional corporate bond trading in the over-the-counter market.
Q2) 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.
Q3) 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.
Q4) Chapter 11 of the act deals with the reorganization of a company, and Chapter 7 deals with the dividend policy of a company.
A)True
B)False
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Chapter 21: The Markets for Bank Obligations
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Q1) 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
Q2) Certificate of deposits (CDs) ________.
A) are financial assets issued by banks or thrifts that indicate a specified sum of money has been deposited at an issuing depository institution.
B) are issued by banks but not thrifts to raise funds for financing their business activities.
C) bear a maturity date and a specified interest rate, but cannot be issued in any denomination.
D) are issued by banks that are not insured by the Federal Deposit Insurance Corporation.
Q3) 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
Q4) 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) In recent years several types of nontraditional amortization schemes have become popular in the mortgage market. The most popular is the ________.
A) interest-only product.
B) hybrid-only product.
C) lockout period product.
D) ARM-only product.
Q2) Qualifying for a conforming loan is important for both the borrower and the mortgage originator.
A)True
B)False
Q3) The LTV has proven to be a good predictor of default: the ________ the LTV, the ________ the likelihood of default.
A) higher; lesser
B) higher; greater
C) lower; greater
D) None of these
Q4) Is prepayment risk like that faced by a bond investor? Discuss.
Q5) What is the mission of Freddie Mac and Fannie Mae? What does their federal charter allow for?
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Chapter 23: Mortgage-Backed Securities Market
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Q1) A stripped mortgage-backed security is created by distributing the principal and interest from a pool of underlying mortgages on an equal basis to two classes of securityholders.
A)True
B)False
Q2) Although the priority rules for the disbursement of the principal payments are known, the precise amount of the principal in each period ________ known. This will depend on the cash flow and, therefore, on the principal payments of the collateral, which will depend on the ________ of the collateral. An assumed ________ allows the cash flow to be projected.
A) is; actual prepayment rate; PSA speed
B) is not; actual prepayment rate; PSA speed
C) is; projected prepayment rate; CPR speed
D) is not; actual prepayment rate; SMM speed
Q3) What is a PO?
Q4) Securitization - the financial framework that allowed Wall Street to package these loans into RMBS - is of enormous benefit to the economy.
A)True
B)False
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Chapter 24: Market for Commercial Mortgage Loans and Commercial
Mortgage-Backed Securities
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Q1) The largest sector of the CMBS market is constituted by ________.
A) securities backed by Ginnie Mae.
B) securities issued by private entities.
C) securities backed by Freddie Mac.
D) securities issued by the two government-sponsored enterprises.
Q2) With ________, the borrower provides sufficient funds for the servicer to invest in a portfolio of Treasury securities that replicates the cash flows that would exist in the absence of prepayments.
A) defeasance
B) yield maintenance charges
C) prepayment lockout
D) prepayment penalty points
Q3) Balloon risk is something that has to be dealt with in structuring an RMBS. A)True
B)False
Q4) In regards to commercial mortgage loans, name four of the major property types that have been securitized.
Q5) CMBS can be issued by Ginnie Mae, Fannie Mae, Freddie Mac, and private entities.
A)True
B)False
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Chapter 25: Market for Asset-Backed Securities
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Q1) Securitization has resulted in financial disintermediation.
A)True
B)False
Q2) In the creation of an ABS, which of the below statements is FALSE?
A) There is a type of securitization transaction involving a conduit that buys the loans and securitizes them.
B) The originator of the loan is the seller of the loan.
C) The originator of the loan is always the issuer of the loan.
D) The SPV in a securitization is referred to as the "issuer" or "trust" in the prospectus.
Q3) What is the key benefit of securitization to financial markets?
Q4) The Small Business Association loan-backed securities are backed by loans made by SBA lenders to qualified businesses but not backed by the full faith and credit of the government.
A)True
B)False
Q5) The SPV is the issuer of the ABS.
A)True
B)False
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Chapter 26: Financial Futures Markets
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Q1) Which of the below statements is FALSE?
A) The key role of futures contracts is that, in a well-functioning futures market, these contracts provide a more efficient means for investors to alter their risk exposure to an asset.
B) A futures market will be the price discovery market when market participants prefer to use this market rather than the cash market to change their risk exposure to an asset.
C) The futures market and the cash market for an asset are drawn apart by an arbitrage process.
D) The argument that futures markets destabilize the prices of the underlying financial assets is an empirical question, but greater price volatility by itself is not an undesirable attribute of a financial market.
Q2) As the value of a futures contract is derived from the value of the underlying instrument, futures contracts are commonly called ________.
A) option instruments.
B) forward instruments.
C) index instruments.
D) derivative instruments.
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Chapter 27: Options Markets
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Q1) An option on a futures contract, commonly referred to as a futures option, gives the buyer the right to buy from or sell to the writer a designated futures contract ________.
A) at an uncertain price on the expiration date.
B) at a random price at any time during the life of the option.
C) at a designated price at a specified time during the life of the option.
D) at a designated price at any time during the life of the option.
Q2) 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
Q3) There are options traded on individual shares of common stock and options traded on common stock indexes.
A)True
B)False
Q4) Describe an outperformance option and illustrate with an example.
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Page 29
Chapter 28: Pricing of Futures and Options Contracts
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Q1) According to arbitrage arguments, the equilibrium or theoretical futures price can be determined on the basis of ________.
A) the price of the asset in the options market.
B) the net book income on the asset until the settlement date.
C) the financing cost, which is the interest rate for borrowing and lending until the settlement date.
D) None of these
Q2) Which of the below statements is FALSE?
A) For strategies applied to stock index futures, a short sale of the stocks in the index means that all stocks in the index must be sold at different times.
B) When illustrating arbitrage strategies, one assumes that (1) only one asset is deliverable, and (2) the settlement date occurs at a known, fixed point in the future.
C) Some futures contracts involve a single asset, but other contracts apply to a basket of assets or an index.
D) The basic arbitrage model presented in this chapter ignores not only taxes but also different tax treatment of cash market transactions and futures transactions.
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Chapter 29: The Applications of Futures and Options Contracts
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Q1) Buying a futures contract decreases a market participant's exposure to a market; selling a futures contract decreases a market participant's exposure to a market.
A)True
B)False
Q2) 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
Q3) Prior to the development of ________, an investor who wanted to speculate on the future course of aggregate stock prices had to buy or short individual stocks.
A) mutual stock funds
B) mutual bond funds
C) stock index futures
D) bond index futures
Q4) Market participants can use interest rate futures in various ways. Name three of these ways.
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Chapter 30: OTC Interest Rate Derivatives: Forward Rate
Agreements, Swaps, Caps, and Floors
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Q1) A ceiling is created by buying an interest rate cap and selling an interest rate floor.
A)True
B)False
Q2) 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.
Q3) What is a forward rate agreement (FRA)? Describe the elements associated with an FRA.
Q4) What is forward start swap?
Q5) Describe an interest rate cap and an interest rate floor.
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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) Credit derivative products have a payout that is contingent upon a credit event occurring. The ISDA provides definitions of credit events. The 1999 ISDA Credit Derivatives Definitions (referred to as the "1999 Definitions") provides a list of eight credit events.
(a) Name four of these eight credit events.
(b) What do these events attempt to capture?
Q3) Basically what an SFOC seeks to do is ________.
A) generate "arbitrage" returns by lending funds.
B) invest borrowed funds in such a way to earn less than the cost of the funds.
C) invest borrowed funds in credit-safe debt.
D) generate "arbitrage" returns by borrowing funds.
Q4) What can a CRT vehicle result in? Explain by commenting on the concern with the banking system.
Page 33
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Chapter 32: The Market for Foreign Exchange and Risk
Control Instruments
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Q1) Mathematically, interest rate parity between the currencies of two countries, A and B, can be expressed as ________.
A)
\(\mathrm{I}(1+\mathrm{i}
\mathrm{B})=\left(\frac{1}{\mathrm{~S}}\right)(1-\mathrm{i} \mathrm{A}) \mathrm{F}\)
B)
\(\mathrm{I}(1-\mathrm{i}
\mathrm{A})=\left(\frac{1}{\mathrm{~F}}\right)(1+\mathrm{i}
\mathrm{B}) \mathrm{S}\)
C)
\(\mathrm{I}(1-\mathrm{i}
\mathrm{A})=\left(\frac{1}{\mathrm{~S}}\right)(1-\mathrm{i} \mathrm{B}) \mathrm{F}\)
D)
\(\mathrm{I}\left(1+\mathrm{i}_{\mathrm{A}}\right)=\left(\frac{1}{\mathrm{~S}}\ri ght)\left(1+\mathrm{i}_{\mathrm{B}}\right) \mathrm{F}\)
Page 34
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