Final Exam

Question 1

Most recent Derivative Security

Answer 1

Credit Derivatives, innovated in the 1990s

Question 2

Two Fully Electronic Derivative Markets in US

Answer 2

1. Eurex

2. CMEs Globex

Question 3

European Options

Answer 3

Only can be exercised at maturity

Question 4

American Style Options

Answer 4

May be exercise at any time until maturity

Question 5

Define Forward Contract

Answer 5

A contract for future payment and delivery.

• Terms determined at initiation
• Negiotiated
• Non Standard

Question 6

Define Credit Forward

Answer 6

A fwd agreement that hedges against an increase in default risk

Question 7

Define Forward Rate Agreement

Answer 7

Contract where buyer agrees to pay a specified rate on a loan that will be settled in the future

Question 8

To enter into a Future Contract

Answer 8

Buyer and seller must pay on inital margin requirment

Question 9

Margin Call is issued when..

Answer 9

Funds in a margin account fall below the requirement in a Future Contract

Question 10

Clearing House

Answer 10

Backs buyers and sellers position in a Future Contract

Question 11

Marked to Market

Answer 11

Means gains or losses on a future contract are realized daily

Question 12

Day Traders

Answer 12

Liquidate positions by the end of the day

Question 13

Define Scalpers

Answer 13

Future or Option Exchange Members who take positions for only a few minutes

Question 14

Buyer of a Call Option Benefits if..

Answer 14

• If stock prices rises

- if volatility of stock price increases

Question 15

Gain and Loss for Writer of a Put Option

Answer 15

• Limited Gain

- Unlimited Loss

Question 16

In Bear Markets, What option makes money

Answer 16

Buying a Put

Writing a Call

Question 17

Commidity Futures Trading Commission (CFTC)

Answer 17

Must approve new Future Contracts

Question 18

Define Swap Contract

Answer 18

An agreement between two parties to exchnage a series of specified periodic cash flows in the future

Question 19

What Increases the Price of a Call Option (3)

Answer 19

1. Increase stock price
2. Increase stock volatility
3. Increased interest rates

Question 20

What makes Put Option more Valuable

Answer 20

1. Increase in volatility

2. Increase Exercise Price

Question 21

Credit Default Swap

Answer 21

1. Reduces Credit Exposure
2. Insures against Default
3. Linked to Subprime Mortgage Crisis

Question 22

Interest Rate Swap

Answer 22

Buyer pays fixed and recieves floating rate

Question 23

Largest Derivative Market in the World

Answer 23

Swap Market measured by amount outstanding

Question 24

Swap Market Primary Regulator

Answer 24

No direct goverenment regulator

Question 25

Cap

Answer 25

Is a Call Option for rising interest rate

Question 26

Floor

Answer 26

Is a Put Option for falling interest rates

Question 27

Interest Rate Collar

Answer 27

Is buying a cap and writing a floor

Question 28

Operational Risk

Answer 28

Is the risk that existing technology or support system may malfunction or breakdown

Question 29

Technology Risk

Answer 29

Is the risk incurred by an FI when its technological investments do no produce anticipated cost savings

Question 30

Insolvency Risk

Answer 30

Is the risk that an FI may not have enough capital to offset a sudden decline in the value of it assets relative to liabilities

Question 31

Firm Specific Credit Risk

Answer 31

Is the risk of default for the borrowing firm associated with the specific types of project risk taken by that firm

Question 32

Systematic Risk

Answer 32

Will remain even in a well diversified portfolio

Question 33

Liquidity Risk

Answer 33

Is the risk that a sudden and unexpected increase in liability withdrawals may require FI to liquidate assets in a very short period of time at low prices Ex) not able to get new repo finacning

Question 34

Having longer maturity asset than liabilities cause bank what risk?

Answer 34

1. Interest rate risk | 2. Liquidity risk

Question 35

Market Risk

Answer 35

Risk arising from unhedged positions in secruities or derivatives

Question 36

Sovereign Risk

Answer 36

Is the risk that repayments from foreign borrowers may be interrupted becasue of interference from foreign governments Ex) Argentina

Question 37

Who cannot be Asset Transformers

Answer 37

Many intermediaries, such as banks cant match maturities of their assets and liabilities

Question 38

Who is at risk from falling interest rates?

Answer 38

A bank that has made floating rate loans funded by longer maturity deposits

Question 39

Rising Interest Rates... DO NOT

Answer 39

decrease the value of fixed income assets and increase the value of Fixed Income liabilities

Question 40

Assets in a banks trading book...

Answer 40

tend to be held for a SHORTER time than asset held in the banking book.

Question 41

Net Charge Off Rates (list high to low) 3

Answer 41

1. Credit Card Loans 2. C & I Loans 3. Real Estate Loans

Question 42

Present Value uncertainty is risk that

Answer 42

the market value of equity will decline if interest rate change