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Q:
What are the major differences between currency forwards, futures, and options?
Q:
Discuss the fundamental determinants of exchange rates.
Q:
What is triangular arbitrage?
Q:
The foreign exchange market is a(n)a. Interbank market.b. Dealer market.c. Over-the-counter market.d. All of the above.e. a and c only.
Q:
Currency options traded in the over-the-counter market are:a. Standardized options. b. Customized options.c. Liquid options.d. Common options.e. None of the above.
Q:
A currency swap is:a. Simply a package of currency forward contracts.b. More transactionally efficient than futures or forwards.c. More suitable for hedging long-dated foreign exchange exposure.d. All of the above.e. a and b only.
Q:
The underlying instrument in a currency option is the:a. Spot currency.b. Foreign currency futures contract.c. Currency forward contract.d. a and b only.e. All of the above.
Q:
In the U.S., currency futures contracts are traded on the:a. New York Stock Exchange.b. Big Board.c. International Monetary Market.d. Chicago Board of Trade.e. None of the above.
Q:
Currency futures do not provide a good vehicle for hedging: a. Long-dated foreign exchange exposure.b. Currency exposure in the British pound.c. Short-term currency exposure.d. Anticipated currency exposure.e. None of the above.
Q:
An investor seeking covered interest arbitrage will accomplish it with short-term borrowing and lending in the:a. Domestic money market.b. Eurocurrency market.c. Foreign money market.d. Treasury market.e. None of the above.
Q:
Covered interest arbitrage is the process that:a. Ensures the same domestic return whether investing domestically or in a foreign country.b. Forces interest rate parity.c. Increases currency risk.d. a and b only.e. All of the above.
Q:
Forward exchange rates are determined by:a. The spot exchange rate.b. The interest rate in two countries.c. The income growth rate.d. a and b only.e. All of the above.
Q:
To protect against adverse foreign exchange rate movements, borrowers and investors can use:a. Currency forward contracts.b. Currency futures.c. Currency options.d. Currency swaps.e. All of the above.
Q:
Monetary policy for member countries of the European Union is administered by the:a. Bundesbank.b. European Central Bank.c. Federal Reserve.d. Bank of England.e. None of the above.
Q:
Members of the European Monetary Union are said to be part of:a. Europe.b. Euroland.c. The Euro zone.d. B and c only.e. All of the above.
Q:
Since the introduction of the euro on January 1, 1999, the single European currency against the U.S. dollar has:a. Strengthened.b. Weakened.c. Remained unchanged.d. Cannot be determined.e. None of the above.
Q:
Dealers in the foreign exchange market realize revenue from:a. The bid-ask spread.b. Trading commissions.c. Trading profits.d. All of the above.e. None of the above.
Q:
When the theoretical cross rate differs from the actual cross rate quoted by dealers, a riskless arbitrage opportunity arises called:a. Index arbitrage.b. Locational arbitrage.c. Triangular arbitrage.d. Credit arbitrage.e. None of the above.
Q:
The spot exchange rate market is:a. A cash market.b. Market for immediate settlement.c. Market for settlement of a foreign exchange transaction within two business days. d. All of the above.e. a and b only.
Q:
The risk that a currency's value may change adversely is called:a. Volatility.b. Currency fluctuation.c. Currency risk.d. Price risk.e. None of the above.
Q:
If the Swiss franc price of the dollar increases:a. The Swiss franc appreciated.b. The dollar appreciated.c. The Swiss franc depreciated.d. b and c only.e. None of the above.
Q:
The price of one currency in terms of another currency is called:a. Exchange rate.b. Currency rate.c. Conversion rate.d. Direct quote.e. Indirect quote.
Q:
An indirect quote is the:a. Number of units of foreign currency needed to acquire one unit of the local currency.b. Number of units of local currency needed to acquire one unit of the foreign currency.c. Reciprocal of a direct quote.d. a and c only.e. None of the above.
Q:
What is an option on a swap, and how can it be used?
Q:
What is an interest rate swap, and what important functions does it perform?
Q:
Explain the reasons for why OTC interest rate options are used by market participants.
Q:
One explanation for the rapid growth of the swap market is the opportunity for credit arbitrage, which arises because of:a. An inverted yield curve.b. Differences between the quality spread for fixed-rate and floating-rate loans.c. Market anomalies.d. Yield differences between different maturity bonds.e. None of the above.
Q:
Participants in financial markets use interest rate swaps to:a. Alter the cash flow characteristics of their assets.b. Capitalize on perceived capital market inefficiencies.c. Change the risk by altering the cash flow characteristics of their liabilities.d. a and b only.e. All of the above.
Q:
In an interest rate agreement, the predetermined interest rate level is called the:a. Reference rate.b. Strike rate.c. Implied rate.d. Basis rate.e. None of the above.
Q:
The only party that is required to perform in an interest rate agreement is the:a. Writer.b. Holder.c. Buyer.d. Dealer.e. None of the above.
Q:
Interest rate caps and floors can be combined to create a(n):a. Spread.b. Interest rate collar.c. Interest rate agreement.d. Caption.e. None of the above.
Q:
Options on interest rate caps are called:a. Swaptions.b. Captions.c. Flotions.d. Collars.e. None of the above.
Q:
An agreement between two parties whereby one party, for an upfront premium, agrees to compensate the other if a designated interest rate, called the reference rate, is different from a predetermined level is known as a(n):a. Forward rate agreement.b. Interest rate swap.c. Interest rate agreement.d. Swaption.e. None of the above.
Q:
The value of an interest rate swap is the:a. Present value of all expected future cash benefits.b. Difference between the present value of the cash flow of the two sides of the swap.c. Discounted value of the floating cash flows.d. Sum of the cash flows.e. None of the above.
Q:
The trade date is the date:a. The counterparties commit to the swap.b. The swap begins accruing interest.c. The swap stops accruing interest.d. The swap is delivered.e. None of the above.
Q:
The date the a swap begins accruing interest is called:a. Trade date.b. Effective date.c. Maturity date.d. Settlement date.e. None of the above.
Q:
Intermediaries involved in interest rate swaps performed the function of a:a. Broker.b. Principal.c. Dealer.d. a and b only.e. None of the above.
Q:
Interest rate swaps:a. Can be replicated by a package of forward contracts.b. Are more liquid than interest rate forward contracts.c. Cost more than a package of interest rate forward contracts. d. a and b only.e. All of the above.
Q:
The initial motivation for the interest rate swap market was borrower exploitation of what was perceived to be:a. Index arbitrage opportunities.b. Credit arbitrage opportunities.c. Currency arbitrage opportunities.d. Risky arbitrage opportunities.e. None of the above.
Q:
The use of an interest rate swap to change the cash flow nature of liabilities is known as:a. Asset swap. b. Liability swap.c. Amortizing swap.d. Bullet swap.e. None of the above.
Q:
In an interest rate swap, the position of the floating-rate payer is equivalent to a:a. Long position in a fixed-rate bond and a short position in a floating rate bond.b. Long position in a floating-rate bond and a short position in a fixed-rate bond.c. Long position in a fixed-rate bond and a long position in a floating rate bond.d. Short position in a fixed rate bond and a long position in a floating rate bond.e. None of the above.
Q:
When two parties agree at a specified future date to exchange an amount of money based on a reference interest rate and a notional principal amount, the agreement is commonly referred to as:a. Interest rate swap.b. Forward rate agreement.c. Swaption.d. Caption.e. None of the above.
Q:
An option that allows the option buyer to purchase a put option is called: a. Caput.b. Cacall.c. Swaption.d. Caption.e. None of the above.
Q:
An option to purchase an option is referred to as a(n):a. Exotic option.b. Compound option.c. Plain vanilla option.d. Spread option.e. None of the above.
Q:
A common OTC option between two sectors of the market is an option on:a. Interest rates.b. The yield curve.c. Fixed-income securities.d. Pass-throughs.e. None of the above.
Q:
Commercial banks and investment banks customize for their clients interest rate contracts that are useful for:a. Index arbitrage.b. Controlling risk.c. Taking positions in markets.d. b and c only.e. None of the above.
Q:
Describe the mechanics of trading futures options.
Q:
Explain how interest rate futures can be used to hedge against adverse interest rate movements.
Q:
Explain the delivery options embedded in the Treasury bond and note futures contracts and their impact on the futures price.
Q:
Dynamic hedging is an investment strategy, which:a. Seeks to insure the value of a portfolio through the use of a synthetic put option.b. Requires rebalancing.c. Takes advantage of the mispricing of stock index futures.d. a and b only.e. All of the above.
Q:
Institutional investors look for the mispricing of stock index futures to create arbitrage profits and thereby enhance portfolio returns. This strategy is referred to as:a. Dynamic hedging.b. Index arbitrage.c. Riskless arbitrage.d. Program trading.e. None of the above.
Q:
To alter the beta of a well-diversified stock portfolio, investment managers can use:a. Stock index futures.b. Interest rate futures.c. Treasury bills.d. Treasury bonds.e. None of the above.
Q:
A pension sponsor, who wishes to alter the composition of the pension funds between stocks and bonds, can use:a. Stock index options.b. Interest rate options.c. Treasury bonds.d. a and b only.e. All of the above.
Q:
The Black-Scholes model limits the use in pricing options on interest rate instruments as a result of which of the following assumptions?a. Short-term rates remain constant.b. Homogeneous investors.c. Price volatility is constant over the live of the option.d. a and c only.e. All of the above.
Q:
Speculation in interest rate futures differs from speculating with interest rate options in that interest rate options:a. Limit downside risk.b. Reduce the upside potential by the amount of the option price.c. Offers unlimited gains.d. a and b only.e. None of the above.
Q:
When the futures option is exercised:a. The futures price for the futures contract will be set equal to the exercise price.b. The position of the two parties is immediately marked-to-market based on the then current futures price.c. The economic benefits from exercising the option are realized by the option holder.d. a and b only.e. All of the above.
Q:
An instrument, which gives the buyer the right to buy from or sell to the writer a designated futures contract at a designated price at anytime during the life of the instruments is called a:a. Stock option.b. Futures option.c. Delayed option.d. Timing option.e. None of the above.
Q:
An investor who wants to speculate that interest rates will rise:a. Can buy interest rate futures.b. Can sell interest rate futures.c. Can simultaneously buy and sell interest rate futures.d. All of the above.e. None of the above.
Q:
Interest rate futures can be used by market participants to:a. Allocate funds between stock and bonds.b. Provide portfolio insurance.c. Enhance returns when futures are mispriced.d. Hedge against adverse interest rate movements.e. All of the above.
Q:
The shape of the yield curve also influences when the short will choose to deliver. Thus, if the carry is negative, the short will:a. Delay delivery until the last permissible settlement date.b. Deliver on the first permissible settlement date.c. Will not do anything.d. Will wait until the shape of the yield curve has changed.e. None of the above.
Q:
The futures price will trade at a premium to the cash price if:a. The yield curve is normal, and the cost of carry is positive.b. The yield curve is normal, and the cost of carry is negative.c. The yield curve is inverted, and the cost of carry is negative.d. The yield curve is flat, and the cost of carry is zero.e. None of the above.
Q:
If the shape of the yield curve is upward sloping and the cost of carry is positive, the futures price will trade at a:a. Discount to the cash price.b. Premium to the cash price.c. Be equal to the cash price.d. Cannot be determined.e. None of the above.
Q:
The theoretical futures price depends on which of the following factors?a. Cash market price.b. Financing cost.c. Cash yield on underlying instrument.d. a and c only.e. All of the above.
Q:
A wild card option is:a. The choice of which acceptable Treasury issue to deliver.b. The choice of when in the delivery month to deliver.c. The choice to deliver after the closing price of the futures contract is determined.d. The choice to deliver the cheapest issue.e. None of the above.
Q:
The option of when in the delivery month of a CBT Treasury bond futures contract to deliver is referred to as:a. Quality option.b. Timing option.c. Wild card option.d. Swap option.e. None of the above.
Q:
The CBT determines which Treasury issues are acceptable for delivery of a Treasury bond futures contract as long as it meets the following criteria:a. The issue must be long-term. b. The issue must have at least 15 years to maturity from the date of delivery if not callable.c. The issue must be short-term.d. The issue cannot be callable.e. None of the above.
Q:
The rate paid on Eurodollar CD futures is the:a. Index price.b. London Interbank Offered Rate (LIBOR).c. T-bill rate.d. Prime rate.e. Money market rate.
Q:
Futures contracts whose underlying instrument is a short-term debt obligation include:a. Treasury bill futures.b. Eurodollar futures.c. Treasury bond futures.d. a and b only.e. All of the above.
Q:
Derivative instruments that are used to control interest rate risk include:a. Interest rate futures.b. Interest rate options.c. Interest rate forwards.d. a and b only.e. All of the above.
Q:
Discuss the differences between covered bonds and residential mortgage-backed securities (RMBS), commercial mortgage-backed securities (CMBS), and other asset-backed securities (ABS).
Q:
Explain sovereign debt ratings assigned by ratings agencies.
Q:
Describe the methods of distribution of new government securities.
Q:
The Pfandbriefe market:a. Is the second largest covered bonds market.b. Is the largest asset in the European bond market.c. Is slightly more than one-half of the German bond market.d. Collateralizes all its bonds by either commercial or residential mortgages.e. a and b only.
Q:
Because they are created using the securitization process, covered bonds are often compared to:a. Residential mortgage-backed securities.b. Commercial mortgage-backed securities.c. Asset-backed securities.d. a and b only. e. All of the above.
Q:
The decline in the share of Brady bonds is due to:a. The fact that many countries have not been able to improve their financial condition so as to raise more money by issuing global bonds and Eurobonds.b. The lesser liquidity of past-due interest bonds.c. The decline in emerging markets bond issues.d. The retirement of these bonds by their issuers.e. All of the above.
Q:
All of the following are true regarding covered bonds EXCEPT:a. They are issued by banks.b. The covered bonds market has become a major sector of the global bonds market.c. Their use of public sector loans as collateral has been in decline.d. The cover pool is static over the life of a covered bond.e. The collateral for covered bonds is predominantly residential and commercial mortgages.
Q:
Governments of emerging markets issue:a. Eurobonds.b. Brady bonds.c. Global bonds.d. a and b only. e. All of the above.
Q:
With regard to the rating of sovereign bonds, political risk:a. Is an assessment of the ability of a government to satisfy its obligations.b. Is an assessment of the willingness of a government to satisfy its obligations.c. Is assessed based on qualitative analysis of the economic and political factors that influence a government's economic policies.d. a and b only.e. b and c only.
Q:
Outside of the U.S. inflation-indexed bonds are known as:a. TIPS.b. HICPS.c. Indexers.d. Linkers.e. None of the above.
Q:
From the issuing government's perspective:a. The ad hoc auction system introduces less market volatility than a regularcalendar auction.b. The ad hoc auction system offers less flexibility in raising funds than a regular calendar auction.c. The ad hoc auction system provides greater stability in scheduling.d. a and b only.e. All of the above.