Investment Analysis
Exam Preparation Guide
Course Introduction
Investment Analysis is a comprehensive course designed to introduce students to the fundamental principles and techniques of evaluating financial assets and investment opportunities. The course covers topics such as risk and return, portfolio theory, valuation of stocks and bonds, asset allocation, and the analysis of financial statements. Students will learn to assess the performance of different investment vehicles, understand market efficiency, and apply quantitative tools for investment decision-making. Through case studies and practical exercises, students will develop the analytical skills necessary to make informed investment choices in both individual and institutional contexts.
Recommended Textbook
Foundations of Financial Markets and Institutions 4th Edition by Frank J. Fabozzi
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32 Chapters
1746 Verified Questions
1746 Flashcards
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Page 2
Chapter 1: Introduction
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Sample Questions
Q1) 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
Q2) Financial markets provide three economic functions. Which of the below is NOT one of these?
A) The interactions of buyers and sellers in a financial market determine the price of the traded asset.
B) Financial markets provide a mechanism for an investor to sell a financial asset.
C) Financial markets increases the cost of transacting.
D) The interactions of buyers and sellers in a financial market determine the required return on a financial asset.
Answer: C
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Page 3
Chapter 2: Financial Institutions, Financial Intermediaries, and Asset Management Firms
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Sample Questions
Q1) 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
Q2) ________ is the risk to a financial institution's economic well-being that results from an adverse movement in the market price of assets it owns.
A) Credit risk
B) Settlement risk
C) Funding liquidity risk
D) Market risk
Answer: D
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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Sample Questions
Q1) Which of the below statements is FALSE?
A) Interest income and fee income are generated from mortgage lending and credit card financing.
B) Fee income is generated from brokerage services and financial investment services.
C) Loans to nonfinancial corporations, financial corporations, (such as life insurance companies), and government entities (state and local governments in the United States and foreign governments) fall into the category of institutional banking.
D) Loans and leasing generate dividend income, and other services that banks offer institutional customers generate fee income.
Answer: D
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
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5
Chapter 4: The US Federal Reserve and the Creation of Money
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Q1) In addition to the individual country central banks, there is the ________, which came into being on January 1, 1999, and is responsible for the implementing monetary policy for the member countries of the European Union.
A) European Monetary Authority
B) American Central Bank
C) European Central Bank
D) Japanese Monetary Authority
Q2) 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
Q3) The most basic monetary aggregate is the fiscal base.
A)True
B)False
Q4) Describe the four monetary aggregates.
Q5) Briefly discuss the nature of a closed economy and an open economy.
Q6) 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) Inflation in advanced economies is ________ the result of excessive demand due to monetary or fiscal policy.
A) never
B) seldom (if ever)
C) frequently
D) always
Q2) The Fed has numerous and complex goals related to conditions in the overall economy, which include price stability, high employment, economic growth, and stability in interest rates and the dollar's value in foreign currencies.
A)True
B)False
Q3) During March 2008, the Fed introduced a new lending facility, called the Primary Dealer Credit Facility, for investment banks and securities dealers. Briefly explain the purpose of this new facility and how it contrasts with that used by commercial banks.
Q4) Identify and briefly describe three of the major goals of Fed policy.
Q5) Discuss two problems that the Fed has in implementing monetary policy.
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Chapter 6: Insurance Companies
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Sample Questions
Q1) Which of the following statements about monoline insurance companies is TRUE?
A) Monoline insurers do not guarantee the timely repayment of the bond principal and interest when a bond insurer defaults on these payments.
B) Monoline insurance companies often require a lengthy claims and submission and adjustment process.
C) Monoline insurance was first devised in 2000.
D) Monoline insurers have been rated AAA and must have this high rating to be effective since they transfer their rating to the bond issue being insured.
Q2) ________ policies allow the policy owners to allocate their premium payments to and among separate investment accounts maintained by the insurance company, within limits, and also to be able to shift the policy cash value among the separate accounts.
A) Guaranteed life insurance
B) Universal life insurance
C) Flexible premium insurance
D) Variable life insurance insurance
Q3) Under what condition can a participating policy pay a higher dividend than the guaranteed minimum?
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Chapter 7: Investment Companies and Exchange Traded Funds
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Q1) Which of the below statements is FALSE?
A) ETFs do not have ticker symbols.
B) ETFs can be sold short or bought on margin (i.e., with borrowed money), and it is even possible to trade options on many ETFs.
C) To assure that the price of the ETF would be very close to the continuously known NAV of the portfolio, an agent could be commissioned to arbitrage between the ETF and the underlying portfolio and keep their values equal.
D) Rather than dealing directly with the fund company, investors buy ETF shares from another individual investor via an exchange at a price determined by supply and demand for the ETF, not the ETF's underlying NAV as is the case for mutual funds.
Q2) Fund companies and distribution companies have developed new outlets for selling mutual funds and expanded their traditional sales channels. The changes that occurred are evident in the rising share of sales through ________.
A) direct sales to investors and intermediaries.
B) third parties and sales through brokers.
C) direct sales to investors and sales through brokers.
D) third parties and intermediaries.
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Page 9
Chapter 8: Pension Funds
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Sample Questions
Q1) To ensure that a pension plan is in compliance with ________, periodic reporting and disclosure statements must be filed with these government agencies.
A) a 401-K plan
B) IRS regulations
C) PBGC
D) ERISA
Q2) The Pension Protection Act of 2006 (PPA) provides ________.
A) significant changes in the operations of private pension plans.
B) insignificant changes in the operations of public pension plans.
C) reduces some tax incentives for retirement savings.
D) reduces all tax incentives for retirement savings.
Q3) Describe the players chosen by a plan sponsor to manage the defined-benefit pension assets.
Q4) In a defined-contribution plan, the amount contributed is typically ________.
A) a percentage of the employee's salary.
B) either a percentage of the employee's salary and/or a percentage of the employer's profits.
C) a percentage of the employee's salary,
D) a percentage of the employee's tenure.
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Chapter 9: Properties and Pricing of Financial Assets
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Sample Questions
Q1) Some properties are intrinsic to the asset, such as its maturity or promised cash flow.
A)True
B)False
Q2) For financial assets traded with market makers, the most relevant component of round-trip cost is the bid-ask spread. The spread charged by a market maker varies sharply from one financial asset to another, reflecting primarily the amount of risk the market maker is assuming by "making" a market. This market-making risk can be related to two main forces. Describe these two forces or determinants of this risk.
Q3) Suppose that you have a bond issued by a German firm and that all payments are in euros for the maturity of the bond which is four years. Why is the cash flow in U.S. dollars that you will receive as a U.S. investor uncertain? In your answer illustrate the uncertainty in terms of an exchange rate premium and the appropriate discount rate.
Q4) This measure of price sensitivity is popularly referred to as ________.
A) basis point sensitivity.
B) value sentiment.
C) duration.
D) saturation.
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Chapter 10: The Level and Structure of Interest Rates
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Sample Questions
Q1) 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.
Q2) The ________ should reflect the coupon interest that will be earned plus either (1) any capital gain that will be realized from holding the bond to maturity, or (2) any capital loss that will be realized from holding the bond to maturity.
A) yield on a bond investment
B) dividend yield on a bond investment
C) bid-ask spread
D) yield on a stock investment
Q3) The difference between the yield on any two bond issues is called a ________.
A) yield difference
B) difference spread
C) coupon rate spread
D) yield spread
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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Sample Questions
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) By convention, when the maturity spread for a Treasury security is more than 100 basis points, the yield curve is said to be a steep yield curve.
A)True
B)False
Q3) According to the ________, the forward rates exclusively represent the expected future rates.
A) preferred habitat theory
B) pure expectations theory
C) market segmentation theory
D) pure liquidity theory
Q4) Name and comment on two of the three main influences on the shape of the Treasury yield curve as suggested by empirical research.
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Chapter 12: Risk/Return and Asset Pricing Models
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Sample Questions
Q1) The multifactor CAPM says that investors want to be compensated only for market risk.
A)True
B)False
Q2) A security's return in equal to its systematic return plus its unsystematic return where
A) the security return, R, may be expressed as R = Rm + '.
B) the systematic return is proportional to the market return and it can be expressed as the symbol beta (or ) times the market return, Rm.
C) unsystematic return, which is independent of market returns, is usually represented by the symbol epsilon ( ').
D) All of these
Q3) The use of variance of returns in standard portfolio theory depends on whether the return distribution is symmetric with fat-tails.
A)True
B)False
Q4) Describe the multifactor CAPM and how it extends the CAPM.
Q5) Explain the concept of framing.
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Chapter 13: Primary Markets and the Underwriting of Securities
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Sample Questions
Q1) In a variant of the auction process, a security is allocated to bidders from the highest bid price (________) to the lower ones (________) until the entire issue is allocated.
A) (highest yield in the case of a bond); (higher yield in the case of a bond)
B) (lowest yield in the case of a bond); (higher yield in the case of a bond)
C) (lowest yield in the case of a bond); (lower yield in the case of a bond)
D) (highest yield in the case of a bond); (lower yield in the case of a bond)
Q2) A private placement is the distribution of shares to a limited number of institutional investors rather than through a public offering.
A)True
B)False
Q3) Give a description of the underwriter discount including the factors that determine the factors that influence it. Give an example of the underwriting fee for an IPO including the underwriter discount as a percentage of the proceeds raised.
Q4) The Securities Acts allow three exemptions from federal registration. Describe two of these three exemptions.
Q5) What is the waiting period? What do underwriters do during the waiting period?
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Chapter 14: Secondary Markets
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Sample Questions
Q1) A perfect market does not allow the sale of borrowed securities.
A)True
B)False
Q2) In the United States, secondary trading of common stock occurs in a number of trading locations. Describe these locations.
Q3) In a continuous market, prices may vary ________.
A) because of the basic situation of supply and demand.
B) are determined discontinuously throughout the trading day.
C) are determined continuously throughout the trading day even if buyers and sellers are not submitting orders.
D) with the pattern of orders reaching the market.
Q4) Effective August 24, 2000, the minimum spread was reduced to ________ ("decimals"), with trades on all stocks in decimals beginning on August 9, 2001.
A) one-eighth
B) one-sixteenth
C) one cent
D) two cents
Q5) 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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Sample Questions
Q1) The Treasury does not issue zero-coupon notes or bonds.
A)True
B)False
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) 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.
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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Q1) ________ are issued in anticipation of the collection of taxes or other expected revenues. The purpose of these borrowings is to even out irregular flows into the treasuries of the issuing entity.
A) BANs
B) TaxRANs
C) GANs
D) TRANs
Q2) What is The Bond Buyer.
Q3) In the secondary market, ________ are supported by the larger brokerage firms and banks, many of whom have investment banking relationships with these issuers.
A) markets for the bonds of larger issuers
B) markets for local credits
C) markets for specific names
D) markets for the debts of smaller issuers
Q4) Municipal bonds generally are traded and quoted in terms of yield (yield to maturity or yield to call). The price of the bond in this case is called a basis price.
A)True
B)False
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Chapter 17: Markets for Common Stock: The Basic
Characteristics
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Q1) The Internal Revenue Code defines short-term as a holding period of one year or less. If a capital gain is classified as a short-term capital gain, it is taxed as ordinary income at the investor's regular income tax rate.
A)True
B)False
Q2) Which of the below statements is TRUE?
A) Dividends (which are typically in the form of stock) are are distributions made by a corporation to its owners that represent a return on their investment.
B) Dividends paid to common stockholders are not legal obligations of a corporation and some corporations do not pay cash dividends.
C) At one time, dividend payments were taxed solely as ordinary income. Ordinary income means that the tax rate applicable is based on the investor's average tax bracket.
D) Depending on the individual's income tax rate, preferential dividends are taxed at either 5% or 15%.
Q3) The key to instituting circuit breakers is coordination and infrequency.
A)True B)False
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Chapter 18: Markets for Common Stock: Structure and Organization
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Q1) Exchanges have usually been mutual organizations with memberships or "seats". Adopting a new technology ________.
A) may benefit the customers of an exchange by reducing the transaction costs but also decrease the value of access privileges and seats of a membership organization.
B) may benefit the customers of an exchange by increasing the transaction costs but also increase the value of access privileges and seats of a membership organization..
C) may benefit the customers of an exchange by reducing the transaction costs but also decrease the value of access privileges and seats of a membership organization.,
D) may benefit the members of an exchange by reducing the transaction costs but also decrease the value of access privileges and seats of a membership organization...
Q2) The OTCBB is a regulated electronic quotation service that displays real-time quotes, last sale prices, and volume information in the OTC equity securities.
A)True
B)False
Q3) Describe the tasks of a NYSE specialist.
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Page 20
Chapter 19: Markets for Corporate Senior Instruments: I
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Sample Questions
Q1) ________ are those that are not subsidiaries of equipment manufacturing firms or bank holding companies.
A) Bank holding companies
B) Dependent finance companies
C) Captive finance companies
D) Independent finance companies
Q2) When the treasurer of a corporation is contemplating an offering of either MTNs or corporate bonds, a factor that affects the decision is ________.
A) the cost of the funds raised before consideration of registration and distribution costs.
B) the inflexibility afforded to the issuer in structuring the offering.
C) the cost of the funds raised after consideration of registration and distribution costs.
D) flexibility afforded to the investor in structuring the offering.
Q3) 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
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21
Chapter 20: Markets for Corporate Senior Instruments: II
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Q1) 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
Q2) ________ of the bankruptcy act deals with the liquidation of a company; ________ covers reorganization.
A) Chapter 1; Chapter 2
B) Chapter 7; Chapter 12
C) Chapter 7; Chapter 11
D) Chapter 11; Chapter 17
Q3) The four general classifications used by bond information services are: ________.
A) utilities, commerce, industrial, and bank holding companies.
B) electricals, transportations, utilities, and finance companies.
C) utilities, transportations, industrial, and banks and finance companies.
D) electricals, transportations, industrial, and financials.
Q4) Can failure to make preferred stock dividend payments force a firm into bankruptcy? Explain.
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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) Which of the below statements is FALSE?
A) The Federal Reserve imposes no limit on the amount of eligible bankers acceptances that may be issued by a bank.
B) An accepting bank that has decided to retain a bankers acceptance in its portfolio may be able to use it as collateral for a loan at the discount window of the Federal Reserve.
C) The Federal Reserve imposes a reserve requirement on funds raised via bankers acceptances that are ineligible.
D) Investing in bankers acceptances exposes the investor to credit risk.
Q3) Yankee banks rely primarily on deposits for funding and make less use of the money markets to obtain funds.
A)True
B)False
Q4) Why might some federal funds transactions require the use of a broker?
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Chapter 22: The Residential Mortgage Market
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Q1) The ________ is the primary attribute used to characterize loans as either prime or subprime.
A) debit score
B) PIT score
C) LTV score
D) credit score
Q2) Prepayment risk can be reduced if the mortgage is insured by a government agency or a private insurance company.
A)True
B)False
Q3) Pipeline risk refers to what we call market risk and dropdown risk.
A)True
B)False
Q4) Freddie Mac and Fannie Mae receive a charter from the federal government that ________.
A) imposes no limits on their business activities.
B) disallows them to operate like other corporations.
C) allows them to operate with certain benefits that are available to other corporations.
D) provides liquidity and support to the Eurobond market.
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Chapter 23: Mortgage-Backed Securities Market
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Q1) Market participants often classify subprime mortgage-backed securities as part of the RMBS market and classify agency mortgage-backed securities and private label mortgage-backed securities as part of the market for asset-backed securities.
A)True
B)False
Q2) A CMO is a security backed by a pool of mortgage pass-through securities or mortgages and is referred to as a derivative security.
A)True
B)False
Q3) Nonagency MBS are issued by conduits of ________.
A) commercial banks.
B) investment banking firms.
C) entities not associated with either commercial banks or investment banking firms.
D) All of these
Q4) 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.
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25
Chapter 24: Market for Commercial Mortgage Loans and Commercial
Mortgage-Backed Securities
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Q1) As with a nonagency RMBS, a servicer is required. Name three responsibilities of a servicer.
Q2) Are CMBS and nonagency RMBS structures similar or different? Discuss.
Q3) Balloon risk is something that has to be dealt with in structuring an RMBS.
A)True
B)False
Q4) CMBS can be issued by ________.
A) Ginnie Mac
B) Fannie Mac.
C) Freddie Mae.
D) private entities.
Q5) Fusion or hybrid deals are multiple borrower CMBS deals that combine loans that are included in conduit deals with a large or "mega" loan.
A)True
B)False
Q6) CMBS are backed by either newly originated or seasoned commercial mortgage loans.
A)True
B)False
Q7) What is a yield maintenance charge? Page 26
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Chapter 25: Market for Asset-Backed Securities
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Q1) The responsibilities of the ________ are to represent the interests of the bond classes by monitoring compliance with covenants and in the event of default to enforce remedies as specified in the governing documents.
A) trustee
B) originator
C) SPV
D) conduit
Q2) Due to the ________, quality of the collateral, and credit enhancement, a corporation can raise funds via a ________ where some of the bond classes have a credit rating better than the corporation seeking to raise funds and where in the aggregate the funding cost is less than issuing corporate bonds.
A) SPV; mobilization
B) OTC; mobilization
C) SPV; securitization
D) OTC; securitization
Q3) All loans must be serviced. What does servicing involve? What is the servicer responsible for?
Q4) What is the key benefit of securitization to financial markets?
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Chapter 26: Financial Futures Markets
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Q1) Associated with most futures exchange is a clearinghouse, which provides a guarantee function.
A)True
B)False
Q2) For interest rate futures contracts are cash settlement contracts whose underlying is a common stock index and the dollar value of a stock index futures contract is the product of the futures price and the contract's multiple.
A)True
B)False
Q3) When a position is first taken in a futures contract, the investor must deposit a ________ dollar amount per contract as specified by the exchange. This amount, called ________, is required as a deposit for the contract.
A) maximum; maximum margin
B) minimum; minimum margin
C) maximum; initial margin
D) minimum; initial margin
Q4) Futures contracts are leveraged instruments that can be used to control risk.
A)True
B)False
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Chapter 27: Options Markets
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Q1) Suppose you purchase a call option on Asset XYZ that has an exercise price of $50. The option price is $2 per share. Suppose that on the expiration date, the current price is $50. What is your net profit or loss per share?
A) -$2.00
B) $0.00
C) $1.00
D) $2.00
Q2) Hedging with options allows the option buyer to limit risk but not maintain the potential to benefit from a favorable price movement.
A)True
B)False
Q3) Options allow the investor to mold a risk/return relationship.
A)True
B)False
Q4) Do futures contracts allow investors to hedge the risks associated with adverse price movements? Explain.
Q5) Describe and summarize the meaning of the four option positions.
Q6) Differentiate between a call option and a put option.
Q7) Comment on the differences between futures and options contracts.
Page 30
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Chapter 28: Pricing of Futures and Options Contracts
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Q1) You lend $200 at 8% per year for three months and proceed to short sell Asset XYZ for $200 in the cash market. You are required to pay $6 to the lender of Asset XYZ (which is the proceeds the lender would have received). You then immediately buy a futures contract at $184 for delivery of asset XYZ in three months (this will cover your short position). What is the net profit or loss from your strategy of lending money, short selling, and buying the futures contract?
A) $14
B) $10
C) -$7
D) -$14
Q2) Suppose a portfolio consisting of the long position in the asset and the short position in the call option is riskless and will produce a return that equals the risk-free interest rate. A portfolio constructed in this way is called ________.
A) a risk-reduced portfolio.
B) an unhedged portfolio.
C) a hedged portfolio.
D) a speculative portfolio.
Q3) Describe an option when (i) in the money and (ii) out of the money.
Q4) 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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Source URL: https://quizplus.com/quiz/21034
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Q1) A thrift or commercial bank wants to make sure that the cost of its funds will not exceed a certain level. This can be done by ________.
A) buying Eurodollar CDs.
B) selling put options on Eurodollar CD futures.
C) buying call options on Eurodollar CD futures.
D) buying put options on Eurodollar CD futures.
Q2) Because the put option buyer gains when the price of the underlying stock index declines, purchasing a ________ will offset any adverse movements in the portfolio's value due to a ________ in the stock market.
A) put option; decline
B) call option; decline
C) put option; rise
D) All of these
Q3) 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.
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Chapter 30: OTC Interest Rate Derivatives: Forward Rate
Agreements, Swaps, Caps, and Floors
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Source URL: https://quizplus.com/quiz/21035
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Q1) 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.
Q2) The terms of an interest rate agreement include ________.
A) the reference rate and the strike rate that sets the ceiling or floor.
B) the length of the agreement and the frequency of settlement.
C) the notional principal amount.
D) All of these
Q3) When one party agrees to pay the other if the reference rate exceeds a predetermined level, the agreement is referred to as ________.
A) an interest rate cap.
B) an interest rate option.
C) an interest rate swap.
D) an interest rate floor.
Q4) 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) Arbitrage transactions can be divided into two types depending on the primary source of the proceeds from the collateral to satisfy the obligation to the tranches. Describe these two types.
Q2) A CDO is a security backed by a diversified pool of equity securities.
A)True
B)False
Q3) Studies have identified regulatory and supervisory concerns with CRT vehicles, such as credit derivatives and CDOs. From these studies, four general issues were identified including ________.
A) clean risk transfer.
B) risk of success of market participants to understand associated risk.
C) potentially low concentration of risk.
D) favorable selection.
Q4) With the development of any market vehicle, there is the concern that market participants will understand the associated risks.
A)True
B)False
Q5) Describe a structured finance operating company (SFOC). Does an SFOC seek a true arbitrage?
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Chapter 32: The Market for Foreign Exchange and Risk
Control Instruments
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Q1) Given a direct quote, we can obtain an indirect quote (which is simply the reciprocal of the direct quote), and vice versa. For example, on March 9, 2009, a U.S. investor is given a direct quote of 1.2674 U.S. dollars for one euro. That is, the price of a euro is $1.2674. What would be the indirect quote for the U.S. investor; that is, one U.S. dollar can be exchanged for how many euros (which is the euro price of a U.S. dollar)?
A) 1.2674
B) 1.0000
C) 0.8988
D) 0.7889
Q2) Members of the EMU are said to be part of "Euroland" or the "euro zone" because the euro became the only legal currency.
A)True
B)False
Q3) The development of the swap market reduced arbitrage opportunities. A)True
B)False
Q4) Exchange rate quotations may be either direct or indirect. Distinguish between a direct and an indirect quote.
Page 35
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