Which one of the following statements about futures contracts is correct?
A. Futures contracts are subject to the same risks as the underlying instruments.
II. Futures contracts have additional interest rate risk die to the future delivery date.
III. Futures contracts traded in a clearinghouse system are exposed to credit risk with numerous counterparties.
B. I
C. I, III
D. II, III
E. I, II, III
Gamma Bank provides a $100,000 loan to Big Bath retail stores at 5% interest rate (paid annually). The loan also has an annual expected default rate of 2%, and loss given default at 50%. In this case, what will the bank's expected loss be? What is the expected loss of this loan?
A. $300
B. $550
C. $750
D. $1,050
Which one of the following four statements does identify correctly the relationship between the value of an option and perceived exchange rate volatility?
A. With increases in perceived future foreign exchange volatility, the value of all foreign exchange
B. As the perceived future foreign exchange volatility decreases, the value of all options increases.
C. As the perceived future foreign exchange volatility increases, the value of all options increases.
D. Option values can only change due to the factors related to the demand for specific options
To estimate the price of gold forwards, an investment analyst focuses on the cost of holding physical gold (bullion) and the cost of shorting the same. Given that physical gold spot price is $1,000, the annual risk-free rate is 5%, and the gold lease rate equals 2% annually, the analyst's best estimate of the gold forward price to equal
A. $950
B. $1030
C. $1070
D. $1100
On January 1, 2010 the TED (treasury-euro dollar) spread was 0.4%, and on January 31, 2010 the TED spread is 0.9%. As a risk manager, how would you interpret this change?
A. The decrease in the TED spread indicates a decrease in credit risk on interbank loans.
B. The decrease in the TED spread indicates an increase in credit risk on interbank loans.
C. Increase in interest rates on both interbank loans and T-bills.
D. Increase in credit risk on T-bills.
John owns a bond portfolio worth $2 million with duration of 10. What positions must he take to hedge this portfolio against a small parallel shifts in the term structure.
A. Long position worth $2 million with duration of 10.
B. Long position worth $20 million with duration of 1.
C. Short position worth $2 million with duration of 10.
D. Short position worth $20 million with duration of 1.
Which one of the following market risk measures evaluates the bank's earnings sensitivity?
A. Cash flow stress testing
B. Large exposure risk identification
C. Earnings-at-risk stress testing
D. Value-at-risk back testing
Which of the following statements about endogenous and external types of liquidity are accurate?
A. Endogenous liquidity is the liquidity inherent in the bank's assets themselves.
II. External liquidity is the liquidity provided by the bank's liquidity structure to fund its assets and maturing liabilities.
III. External liquidity is the non-contractual and contingent capital supplied by investors to support the bank in times of liquidity stress.
IV. Endogenous liquidity is the same as funding liquidity.
B. I, II
C. I, III
D. II, III
E. I, II, IV
Financial regulators in a European country are considering banning trading in highly complex derivative
instruments that are not settled through a centralized clearinghouse.
This ban can result in:
A. The value of the country's currency dropping
II. Counterparties involved in trading of these derivative instruments failing to fulfill their obligations
III. The business model relying on these instruments failing IV. Certain activities becoming illegal
B. I, II
C. II, III
D. I, IV
E. II, III, IV
Mega Bank has $100 million in deposits on which it pays 3% interest, and $20 million in equity on which it pays no interest. The loan portfolio of $120 million earns an average rate of 10%. If the rates remain the same, what is the net interest income of Mega Bank?
A. $2 million per year
B. $5 million per year
C. $9 million per year
D. $12 million per year
