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Banking
Q:
A credit forward agreement specifies a credit spread on a benchmark U.S. Treasury bond.
Q:
In a credit forward agreement hedge, the loss on the balance sheet cash position is offset completely by the gain on the off-balance-sheet credit forward agreement if the characteristics of the benchmark bond and the bank's loan to the borrower are the same.
Q:
Hedging effectiveness often is measured by the squared correlation between past changes in the spot asset prices and futures prices.
Q:
The hedge ratio measures the impact that tailing-the-hedge will have on the number of contracts necessary to hedge the cash position.
Q:
Tailing-the-hedge normally requires an FI manager to utilize more futures contracts to hedge a cash position than are warranted by the initial analysis.
Q:
Hedging foreign exchange risk in the futures market may involve uncertainty about all of the transactions necessary to achieve the hedge to fulfillment.
Q:
An adjustment for basis risk with a value of "br" less than one means that the percent change in the spot rates is greater than the change in rate in the deliverable bond in the futures market.
Q:
Basis risk occurs when the underlying security in the futures contract is not the same asset as the cash asset on the balance sheet.
Q:
A conversion factor often is used to determine the invoice price on a futures contract when a bond other than the benchmark bond is delivered to the buyer.
Q:
Hedging a specific on-balance-sheet cash position usually will only require more T-bill futures contracts than hedging the same cash position with T-bond futures contracts because the T-bond contract size is only 10 percent as large as large as the T-bill contract.
Q:
All bonds that are deliverable under a Treasury bond futures contract have a maturity of 20 years and an interest rate of 8 percent.
Q:
The sensitivity of the price of a futures contract depends on the duration of the deliverable asset underlying the contract.
Q:
Hedging selectively only a portion of the balance sheet is an attempt to increase the return of the FI by accepting some level of interest rate risk.
Q:
Selective hedging occurs by reducing the interest rate risk by selling sufficient futures contracts to offset the interest rate risk exposure of a portion of the cash positions on the balance sheet.
Q:
Selective hedging that results in an over-hedged position may be regarded as speculative by regulators.
Q:
Routine hedging will allow the FI to achieve greater return from the assets and liabilities on the balance sheet.
Q:
Macrohedging uses a derivative contract, such as a futures or forward contract, to hedge a particular asset or liability risk.
Q:
Microhedging uses futures or forward contracts to hedge the entire balance sheet duration gap.
Q:
It is not possible to separate credit risk exposure from the lending process itself.
Q:
More FIs fail due to credit risk exposure than exposure to either interest rate risk or foreign exchange risk.
Q:
An off-balance-sheet forward position is used to hedge the FI's on-balance-sheet risk exposure.
Q:
An FI with a negative duration gap is exposed to interest rate declines and could hedge its interest rate risk by buying forward contracts.
Q:
An FI with a positive duration gap is exposed to interest rate declines and could hedge its interest rate risk by buying forward contracts.
Q:
Immunizing the balance sheet against interest rate risk means that gains (losses) from an off-balance-sheet hedge will exactly offset losses (gains) from the balance sheet position.
Q:
A perfect hedge, or perfect immunization, seldom occurs.
Q:
Futures contracts are the primary security that insurance companies and banks use to hedge interest rate risk prior to originating mortgages.
Q:
As of June 2012, commercial banks held more forward contracts than futures contracts for trading.
Q:
Delivery of the underlying asset almost always occurs in the futures market.
Q:
A futures contract has only one payment cash flow that occurs at the time of delivery.
Q:
A forward contract has only one payment cash flow that occurs at the time of delivery.
Q:
Forward contracts are marked-to-market on a daily basis.
Q:
As of June 2012, U.S. commercial banks held over $42 trillion of forward contracts that were listed for trading on the Chicago Mercantile exchange.
Q:
Commercial banks, investment banks, and broker-dealers are the major forward market participants.
Q:
Forward contracts are individually negotiated and, therefore, can be unique.
Q:
In a forward contract agreement, the quantity of product to be traded, the time of the actual trade and the price are determined at the time of the agreement.
Q:
A forward contract specifies immediate delivery for immediate payment.
Q:
A spot contract specifies deferred delivery and payment.
Q:
The Financial Accounting Standards Board requires that all derivatives be marked-to-market with any losses and gains transparent on FI's financial statements.
Q:
The notational value of derivative contracts for the top 25 derivative users was less than the total credit exposure as of June 2012.
Q:
Derivative contracts allow an FI to manage interest rate and foreign exchange risk.
Q:
Federal regulations in the U.S. allow derivatives to be used only by the 25 largest banks.
Q:
Under the 1982 guidelines, would the Fed approve the merger of Banks A and C?
A. It is likely to approve because it is not a concentrated market.
B. It is unlikely to approve because the post-merger HHI has increased by over 100.
C. It is likely to approve because the post-merger HHI has increased by over 100.
D. Likely to approve because the post-merger HHI has increased by less than 5,000.
E. It is unlikely to approve because the post-merger HHI has increased by an amount over 5,000.
Q:
The following three FIs dominate a local market and their total assets are given below.If Bank A acquires Bank C, what is the new Herfindahl Index (HHI)? A. 60.B. 100.C. 5,800.D. 5,050.E. 6,525.
Q:
The following three FIs dominate a local market and their total assets are given below.Under the 1982 guidelines, would the Fed approve the merger of Banks A and B? A. It is likely to approve because it is not a concentrated market.B. It is unlikely to approve because the post-merger HHI has increased by over 100.C. It is likely to approve because the post-merger HHI has increased by over 100.D. Likely to approve because the post-merger HHI has increased by less than 5,000.E. It is unlikely to approve because the post-merger HHI has increased by an amount over 5,000.
Q:
The following three FIs dominate a local market and their total assets are given below.If Bank A acquires Bank B, what is the new Herfindahl Index? A. 60.B. 100.C. 5,800.D. 5,050.E. 6,525.
Q:
The following three FIs dominate a local market and their total assets are given below.What is the Herfindahl-Hirschman Index (HHI) for the local market? A. 1,000.B. 3,450.C. 3,550.D. 3,400.E. 60.
Q:
The following three FIs dominate a local market and their total assets are given below.What are the market shares of banks A, B and C, respectively? A. 25 percent, 45 percent, and 30 percent.B. 30 percent, 40 percent, and 30 percent.C. 40 percent, 30 percent, and 30 percent.D. 25 percent, 30 percent, and 45 percent.E. 25 percent, 35 percent, and 40 percent.
Q:
How do you think the Department of Justice (DOJ) would characterize this market before the merger and which merger is more likely to be approved?
A. This is a competitive market and either merger will be acceptable to the DOJ.
B. This is a concentrated market and neither merger will be acceptable to the DOJ.
C. This is a concentrated market, but the merger between Banks 1 and 3 is more likely to be acceptable to the DOJ.
D. This is a competitive market, but the merger between Banks 1 and 2 is more likely to be acceptable to the DOJ.
E. This is a moderately concentrated market, but the merger between Banks 1 and 3 is more likely to be acceptable to the DOJ.
Q:
If Bank 1 is acquired by Bank 3, what is the impact on the market's HHI? A. An increase in the HHI of 1600.B. An increase in the HHI of 624.C. An increase in the HHI of 1563.D. A decrease in the HHI of 222.E. A decrease in the HHI of 360.
Q:
If Bank 1 is acquired by Bank 2, what is the impact on the market's HHI? A. An increase in the HHI of 1600.B. An increase in the HHI of 625.C. An increase in the HHI of 1563.D. A decrease in the HHI of 222.E. A decrease in the HHI of 360.
Q:
What is the market's Herfindahl Hirschman Index (HHI)? A. 4,688.B. 3,600.C. 548.D. 8.E. 0.
Q:
What is the market share of Bank 3? A. 12.5 percent.B. 37.5 percent.C. 25.0 percent.D. 62.5 percent.E. 50.0 percent.
Q:
What is the market share of Bank 2? A. 12.5 percent.B. 37.5 percent.C. 25.0 percent.D. 62.5 percent.E. 50.0 percent.
Q:
What is the market share of Bank 1? A. 12.5 percent.B. 37.5 percent.C. 25.0 percent.D. 62.5 percent.E. 50.0 percent.
Q:
Which of the following items is an advantage of international expansion for an FI?
A. An FI faces the political risk that a change in government may lead to the nationalization of fixed assets.
B. A global FI must master the rules and regulations of each market in which it operates.
C. The fixed costs of establishing overseas organizations may be very high in certain markets.
D. International expansions allow an FI to maintain contact with and provide service to the needs of domestic multinational corporations.
E. The absolute level of risk exposure in certain markets can be very high.
Q:
Which of the following is a disadvantage of international expansion?
A. An FI can lower its net regulatory burden and therefore increase its potential net profitability by finding countries that have reduced activity restrictions and reserve requirements.
B. An FI can generate additional returns from new product innovations if it can sell such services internationally rather than just domestically.
C. Monitoring and information collection cost often are higher in international markets.
D. International expansion allows an FI to search for cheaper and more available sources of funds.
E. International activities enhance the opportunities to diversify the risk of earnings flows.
Q:
Which of the following is an advantage to an FI of expanding globally?
A. Exposure to nationalization or expropriation.
B. Economies of scale.
C. High fixed costs.
D. Costs of complying with different regulatory requirements.
E. Information and monitoring costs.
Q:
Which of the following is not a feature of the Foreign Bank Supervision Enhancement Act?
A. The Federal Reserve has the power to close a foreign bank if it is engaged in unsafe and unsound banking practice.
B. The Federal Reserve has the responsibility to examine each subsidiary, branch, agency, or representative office at least once each year.
C. The Fed's approval is necessary to establish a subsidiary, branch, agency or representative office in the U.S.
D. Only foreign subsidiaries with access to FDIC insurance can take retail deposits under $100,000.
E. After December 19, 1992, state-licensed agencies and branches could not engage in any activity no permitted to a federal branch.
Q:
Which of the following was not an operating characteristic of foreign banks operating in the U.S. prior to the International Banking Act of 1978?
A. They had no access to the Federal Reserve's discount window.
B. They were not subject to the Federal Reserve's audits and exams.
C. They had special rates on FDIC deposit insurance.
D. They could not use the Fedwire or the fed funds market.
E. They were not subject to the Glass-Steagall Act.
Q:
Prior to the International Banking Act of 1978, foreign banks operating with state licenses
A. were not subject to the Federal Reserve's reserve requirements.
B. were not subject to interstate branching restrictions.
C. were not subject to restrictions on corporate securities underwriting.
D. All of the above.
E. Answers A and B only.
Q:
Which of the following has NOT been a factor deterring U.S. bank expansion abroad?
A. The implementation of risk-based capital requirements effective in 1993.
B. The increased competition from the large Japanese banks through the mid-1990s.
C. The effects of the collapse of the financial markets in several emerging markets.
D. The ability of the U.S. banks to achieve large excess capital positions in the second half of the 1990s.
E. The passage of the European Community Second Banking Derivative.
Q:
The USA Patriot Act of 2001
A. requires U.S. banks to improve their due diligence reviews to guard against money laundering.
B. prohibits U.S. banks from providing banking services to foreign banks that do not have a physical presence in any country.
C. gives to federal authorities the power to subpoena the records of a foreign bank's U.S. correspondent account.
D. All of the above.
E. Answers B and C only.
Q:
A Eurodollar transaction
A. can only occur in Europe.
B. is a swap of Euros for dollars.
C. is a transaction that involves dollars outside of the U.S.
D. is a swap of dollars for Euros.
E. must be reported immediately to international monetary authorities.
Q:
The establishment of a global or international presence by an FI can be achieved in all but which of the following ways?
A. Selling financial services from a domestic office to a domestic customer who has commercial activities in a foreign country.
B. Selling financial services to a foreign customer through subsidiary companies in a foreign country.
C. Selling financial services through a branch, agency, or representative office.
D. Selling financial services from domestic offices to foreign customers.
E. Two of the above do not qualify an FI as achieving an international presence.
Q:
What is seen as a reason for the increased expansion of foreign bank activities in the United States following the passage of the International Banking Act?
A. Access to the Federal Reserve's discount window, Fedwire, and FDIC insurance.
B. Absence of the Federal Reserve's reserve requirements, audits, and exams.
C. No interstate branching restrictions.
D. No restrictions on corporate securities underwriting activities.
E. Answers C and D only.
Q:
Identify the fundamental regulatory philosophy underlying the International Banking Act.
A. Too big to fail.
B. National treatment.
C. Reciprocal arrangement.
D. X efficiencies.
E. Unit banks.
Q:
Which of the following is a factor deterring U.S. bank expansions abroad?
A. The dollar as an international medium of exchange.
B. Political risk concerns among savers in emerging markets.
C. Domestic regulatory restrictions.
D. Capital constraints.
E. Technology and communications improvements.
Q:
What are the ways in which an FI can establish a global or international presence?
A. Selling financial services from its domestic offices to foreign customers.
B. Selling financial services through a branch, agency, or representative office established in the foreign customer's country.
C. Selling financial services to a foreign customer through subsidiary companies in the foreign customer's country.
D. All of the above.
E. Answers A and B only.
Q:
The merger bid premium usually is defined as
A. the difference between the price paid for the company and the market value immediately prior to the merger announcement.
B. the ratio of the purchase price of a target bank's equity to its book value.
C. the difference between the market value immediately prior to the merger announcement and the book value of the company.
D. All of the above.
E. Answers A and B only.
Q:
The use of the Herfindahl-Hirschman Index (HHI) to measure bank concentration has been criticized because
A. ascertaining whether the relevant geographic scope of the market should be regional, national, or city is becoming increasingly difficult to determine.
B. the index was originally designed for nonfinancial competition.
C. separating financial markets into banks, thrifts, and insurance companies is becoming increasingly difficult to justify.
D. All of the above.
E. Answers A and C only.
Q:
A value below 1,000 of the Herfindahl-Hirschman Index (HHI) is considered to reflect
A. a highly concentrated market.
B. an unconcentrated market.
C. a high growth market.
D. a moderately concentrated market.
E. an untapped market.
Q:
A level _____ of the Herfindahl-Hirschman Index (HHI) is considered to reflect a highly concentrated market.
A. above 1,000
B. above 10,000
C. between 1,000 and 1,500
D. above 1,800
E. below 1,000
Q:
The Herfindahl-Hirschman Index (HHI) is a measure of
A. market concentration.
B. profitability.
C. market performance.
D. annual sector growth.
E. investor reaction.
Q:
The realization of revenue synergies from the acquisition of a bank may come
A. from expansion into less than fully competitive markets.
B. from acquiring a bank in a growing market.
C. through diversification of asset and liability mixes between the two banks.
D. All of the above.
E. Answers B and C only.
Q:
The argument that mergers are valuable because they create revenue synergies is based on
A. the opportunity to expand into less than fully competitive markets.
B. the diversification effects of combining dissimilar asset and liability portfolios.
C. realizable economies of scope.
D. the enhancement of revenues by acquiring a bank in a growing market.
E. Answers A, B, and D only.
Q:
Which of the following is true of X efficiencies?
A. They result from diseconomies of scope.
B. They are difficult to pin down in a quantitative fashion.
C. They result from diseconomies of scale.
D. They are a direct result of significant economies of scope.
E. They are a direct result of significant economies of scale.
Q:
Which of the following is NOT an advantage of domestic geographic diversification?
A. Consumer convenience.
B. Risk diversification.
C. Efficiency of operations.
D. Exploitation of economies of scale.
E. Exploitation of monopoly power.
Q:
The Riegle-Neal Act of 1994
A. specifically allows banks to establish de novo branches in new states.
B. effectively allows full interstate branching within the U.S.
C. is given credit for initiating a wave of bank mergers across the U.S.
D. All of the above.
E. Answers B and C only.
Q:
Legislations restricting geographic expansion have been undermined in all of the following ways EXCEPT
A. regional banking pacts.
B. purchase of troubled banks.
C. opening of nonbank banks.
D. acquisition of subsidiaries.
E. acquisition of insurance companies out of state.
Q:
The first regional banking pact in the U.S. was in
A. the Southeast.
B. New England.
C. the Northwest.
D. the Southwest.
E. the Midwest.