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Q:
Which of the following are contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a pre-specified price for a specified time period?
A. Options.
B. Futures.
C. Forwards.
D. Swaps.
E. All of the above.
Q:
In economic terms, the letters of credit (LCs) and stand-by letters of credit SLCs sold by an FI
A. are contractual commitments to make a loan up to a stated amount at a given interest rate in the future.
B. are insurance against the frequency or severity of some particular future occurrence.
C. are nonstandard contracts between two parties to deliver and pay for an asset in the future.
D. are standardized contract guaranteed by organized exchanges to deliver and pay for an asset in the future.
E. Answers C and D only.
Q:
What are commercial letters of credit?
A. They are contractual commitments to make a loan up to a stated amount at a given interest rate in the future.
B. They are contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a pre-specified price for a specified time period.
C. They are nonstandard contracts between two parties to deliver and pay for an asset in the future.
D. They are standardized contract guaranteed by organized exchanges to deliver and pay for an asset in the future.
E. They are contingent guarantees sold by an FI to underwrite the trade or commercial performance of the buyer of the guaranty.
Q:
Which of the following ratios do FIs and regulators often use as a simple measure of solvency?
A. Current ratio.
B. Capital to assets.
C. Earnings before interest and taxes to total assets.
D. Quick ratio.
E. Asset turnover ratio.
Q:
What is a swap?
A. An agreement between two parties to exchange assets or a series of cash flows for a specific period of time at a specified interval.
B. An agreement between a buyer and a seller at time 0 to exchange a nonstandardized asset for cash at some future date.
C. A contract that gives the holder the right, but not the obligation to buy or sell the underlying asset at a specified price within a specified period of time.
D. Trading in securities prior to their actual issue.
E. Contractual commitment to make a loan up to a stated amount at a given interest rate in the future.
Q:
Which of the following is true of the market price of an options contract over time?
A. It is set at time 0.
B. It is fixed over the life of the contract.
C. It changes based on the market value of the underlying asset.
D. It increases with time to expiration.
E. It is based on supply and demand.
Q:
Which of the following is true of the market price of a futures contract over time?
A. It is set at time 0.
B. It is fixed over the life of the contract.
C. It changes based on the market value of the underlying asset.
D. It decreases with time to expiration.
E. It is based on supply and demand.
Q:
Which of the following is the newest addition to the derivative securities markets?
A. Options contracts.
B. Futures contracts.
C. Swap agreements.
D. Forward contracts.
E. Credit derivatives.
Q:
The effect to an FI of default by the counterparty to a derivative contract is LEAST serious with
A. options contracts.
B. futures contracts.
C. swap agreements.
D. forward contracts.
E. loan commitments.
Q:
As of 2012, the top 25 U.S. commercial banks accounted for ________ percent of OBS derivative contracts among FDIC-insured institutions.
A. 100
B. 99.8
C. 92.6
D. 81.9
E. 60.7
Q:
Which of the following statements best describe a derivative contract?
A. Contractual commitments to make a loan up to a stated amount at a given interest rate in the future.
B. Contingent guarantees sold by an FI to underwrite the performance of the buyer of the guaranty.
C. Agreement between two parties to exchange a standard quantity of an asset at a predetermined price at a specified date in the future.
D. Trading in securities prior to their actual issue.
E. Loans originated by an FI and then sold to other investors with recourse.
Q:
As of June 2012, the vast majority of OBS activities of commercial banks was
A. future and forward contracts.
B. credit derivatives.
C. commitments to buy FX.
D. swap contracts.
E. loans sold with recourse.
Q:
Off-balance-sheet items are
A. items omitted from the short form balance sheet.
B. contingent assets and liabilities.
C. risk-free assets and liabilities.
D. exceptionally risky assets and liabilities.
E. foreign (off shore) assets and liabilities.
Q:
FIs are competing directly with loan commitments, one of their own OBS products, when they also offer:
A. Futures contracts.
B. Swaps.
C. Standby letters of credit.
D. Forward contracts.
E. When-issued trading.
Q:
An exporter demands a letter of credit in order to
A. guarantee safe delivery of goods to the importer.
B. guarantee receipt of payment from the importer upon receipt of the goods.
C. protect against adverse changes in foreign exchange rates.
D. protect against adverse changes in international interest rates.
E. ascertain the creditworthiness of the importer.
Q:
Which of the following situations is similar to the externality effect?
A. Exercising an adverse material change in conditions clause as a last resort, thereby canceling or repricing a loan commitment.
B. Increase in the cost of funds above normal levels while many FIs scramble for funds to meet their commitments to customers during a credit crunch.
C. In a loan commitment, the borrower takes down only part of the funds over the specified time-period.
D. The buyer of a commercial letter of credit fails to perform as promised under a contractual obligation.
E. All of the above.
Q:
What is a possible reason behind restricted supply of spot loans to borrowers during a credit crunch?
A. Expansionary monetary policy actions of the Federal Reserve.
B. FI's increased aversion toward lending.
C. Shift to the right in the loan supply function at all interest rates.
D. Low aggregate demand from borrowers to take down loan commitments.
E. Decrease in cost of funds.
Q:
If a future credit crunch is possible, a loan commitment may expose the FI to
A. credit risk.
B. interest rate risk.
C. sovereign country risk.
D. funding risk.
E. exchange rate risk.
Q:
An "adverse material changes in conditions" clause is included in loan commitments to protect the FI against
A. credit risk.
B. interest rate risk.
C. takedown risk.
D. funding risk.
E. exchange rate risk.
Q:
Which of the following is true of an adverse material change in conditions clause' used in a loan commitment?
A. It allows the FI to cancel or reprice a loan commitment.
B. It protects the lender against takedown risk.
C. It protects the lender against basis risk.
D. Exercise of the clause helps defaulted borrowers.
E. It is exercised frequently by most FIs.
Q:
Takedown risk in a loan commitment exposes the FI to
A. immediate liquidity risk.
B. basis risk.
C. spread risk.
D. externality effects.
E. future liquidity risk.
Q:
The quantity risk exposure of a loan commitment is
A. credit risk.
B. interest rate risk.
C. takedown risk.
D. funding risk.
E. exchange rate risk.
Q:
Which of the following refers to the fee charged on the unused balance of a loan commitment.
A. Up-front fee.
B. Facility fee.
C. Compensating balance.
D. Commitment fee.
E. Closing costs.
Q:
Back-end fees on loan commitments are charged as a certain percentage of
A. commitment size.
B. loan taken down.
C. utilized portion of commitment size.
D. unused portion of commitment size.
E. interest payable on the loan commitment.
Q:
Up-front fees on loan commitments are charged as a certain percentage of
A. commitment size.
B. loan taken down.
C. utilized portion of commitment size.
D. unused portion of commitment size.
E. interest payable on the loan commitment.
Q:
When an FI pre-commits to lending at a fixed rate, it is exposed to
A. credit risk.
B. interest rate risk.
C. takedown risk.
D. funding risk.
E. exchange rate risk.
Q:
Loan loss reserves are classified as
A. on-balance-sheet assets.
B. off-balance-sheet assets.
C. off-balance-sheet liabilities.
D. on-balance-sheet liabilities.
E. equity capital.
Q:
Rediscounted bankers' acceptances are classified as
A. on-balance-sheet assets.
B. off-balance-sheet assets.
C. off-balance-sheet liabilities.
D. on-balance-sheet liabilities.
E. equity capital.
Q:
Standby letters of credit are classified as
A. on-balance-sheet assets.
B. off-balance-sheet assets.
C. off-balance-sheet liabilities.
D. on-balance-sheet liabilities.
E. equity capital.
Q:
Loan commitments are classified as
A. on-balance-sheet assets.
B. off-balance-sheet assets.
C. off-balance-sheet liabilities.
D. on-balance-sheet liabilities.
E. equity capital.
Q:
Where are the contingent items disclosed in the financial statements?
A. On the assets side of the balance sheet.
B. On the liabilities side of the balance sheet.
C. As footnotes to financial statements.
D. In the income statement.
E. In the director's report.
Q:
The amount of regulations that have been proposed because of the increased use of risk-reducing OBS derivatives is increasing.
Q:
The ability to form financial holding companies for the purpose of creating full-service financial institutions has caused an increase in affiliate risk.
Q:
The estoppel argument used in bank failures is based on the concept of financial unsophistication.
Q:
Fees from derivative products are an increasing component of noninterest income for many FIs.
Q:
The source of strength doctrine involving failed FIs in multibank holding company corporate structures has been widely accepted by the courts.
Q:
To be an affiliate of a holding company, the parent must own at least 50 percent of the shares of the affiliate company.
Q:
Settlement risk on wire transfers involves intraday credit risk.
Q:
Funds transferred on CHIPS are settled immediately.
Q:
Funds transferred on Fedwire are settled at the end of the day.
Q:
The Clearing House Interbank Payments System (CHIPS) is an international wire transfer system owned by the participating banks in the countries in which it is used.
Q:
Loans sold without recourse have contingent liability off-balance-sheet implications for the FI that sells the loan.
Q:
When-issued trading involves the commitment to buy and sell securities before they are issued.
Q:
More FIs fail as a result of credit risk exposures than either interest rate or FX risk exposure.
Q:
Credit derivatives allow FIs to hedge credit risk on individual assets, but not on portfolios of assets.
Q:
If a commercial bank engages in OBS activities, there are no additional capital requirements imposed by regulators.
Q:
If an FI is a counterparty to a swap arrangement, it must record the notational value of the swap as the market value.
Q:
Contingent credit risk is more serious for futures contracts than forward contracts because the over-the-counter arrangements necessary to replicate the guarantees at a later date.
Q:
One way to minimize contingent credit risk is to use derivative products sold on organized exchanges.
Q:
Contingent credit risk on derivative contracts is more serious for futures contracts than for forward contracts.
Q:
Contingent credit risk occurs with the use of derivative products and involves the potential default by a counterparty.
Q:
The use of LCs and SLCs may result in an FI having a higher concentration ratio than desired for a particular industry.
Q:
In many ways, SLCs perform similar functions for a borrower as do loan commitments.
Q:
Standby letters of credit perform an insurance function similar to that of commercial and trade letters of credit.
Q:
As compared to LCs, SLCs typically are used to cover contingencies that potentially are more severe and which may not be trade related.
Q:
In the U.S., commercial banks are the only issuers of standby letters of credit.
Q:
Commercial letters of credit are used only in international trade.
Q:
Commercial letters of credit are guarantees that are issued to cover contingencies that are potentially more severe and less predictable than those covered by standby letters of credit.
Q:
The ability to provide loan commitments is a signal to borrowers that the FI has a lower risk portfolio.
Q:
Derivative products used in managing contingent credit risk can only be acquired as over-the-counter arrangements.
Q:
Loan commitment activities increase the insolvency exposure of FIs that engage in such activities.
Q:
The aggregate commitment funding risk can increase the cost of funds above normal levels.
Q:
Basis risk occurs on a loan commitment because the spread of a pricing index over the cost of funds may vary.
Q:
An up-front fee on a loan commitment rewards the FI for its willingness to stand ready to lend the commitment amount during some agreed upon time period.
Q:
One way to completely protect the lender against interest rate risk on a loan commitment is for the lender to price the loan at a variable rate against some index.
Q:
Interest rate risk is part of the loan commitment contingent risk because of the uncertainty of changes in interest rates before the borrower exercises his option to borrow.
Q:
The extremely high growth of OBS activities since the early 1990s has caused regulators to recognize the potential risk exposure to FIs from their use.
Q:
The current market value or contingent claim value of OBS items overestimates their notional value.
Q:
The use of an up-front fee by a bank eliminates the contingent risk on a loan commitment.
Q:
The Federal Reserve requires banks to complete schedule L with their quarterly call reports to list the notional size and variety of off-balance-sheet activities.
Q:
The current market value of an off-balance-sheet item is determined by finding the current market value of the underlying item.
Q:
If an FI enters into a loan commitment, it is essentially entering into a forward contract.
Q:
A default option is exercised when the holder requests a draw on the loan commitment.
Q:
The present value of an off-balance-sheet item is its notional value.
Q:
All call options are eventually exercised and the underlying asset must be delivered.
Q:
The delta of an option is the sensitivity of an option's value to a unit change in the value of the underlying asset.
Q:
Consider the following discrete probability distributions of payoffs for 3 securities that are held in a DI's trading portfolio (payoff amounts shown are in $millions): What is the expected payoff, the 99% value at risk (VAR) and the expected shortfall (ES) of security Gamma (in millions)? A. +$248; -$2,000; -$2000B. -$248; -$20; -$2,000C. -$2.150; -$2,150; -$2,150D. +$248; -$21.50; -$20.00E. $0.00; -248; -$2,150
Q:
Consider the following discrete probability distributions of payoffs for 3 securities that are held in a DI's trading portfolio (payoff amounts shown are in $millions): Based on your answers to the previous three question, which of the following is true? A. Security Alpha represents the riskier of the two assets in the trading portfolio because there is a one-percent probability of loss the following day.B. Both securities have the same expected payoff; therefore, it makes no difference which is in the trading portfolio.C. Security Beta is the better asset to have in the trading portfolio since there is a 50 percent probability of a $400 payoff versus only $355 with security Alpha.D. Both securities have the same expected payoff and value at risk (VAR), therefore it makes no difference which is in the trading portfolio.E. According to the expected shortfall measure, if tomorrow is a bad trading day, losses will exceed $25 million.
Q:
Consider the following discrete probability distributions of payoffs for 3 securities that are held in a DI's trading portfolio (payoff amounts shown are in $millions): What is the expected shortfall (ES) of securities Alpha and Beta at the 99 percent confidence level, respectively (in millions)? A. -$300 and -$3,300B. -$3 and -$24.75C. -$3 and -$25.50D. -$300 and -$300E. -$ and -$0.75.
Q:
Consider the following discrete probability distributions of payoffs for 3 securities that are held in a DI's trading portfolio (payoff amounts shown are in $millions): What is the one-day, 99% confidence level, value at risk (VAR) of securities Alpha and Beta, respectively (in millions)? A. $3 and $25.50B. $3 and $0.75C. $248 and 248D. $300 and $300E. 300 and 3,300