Question 1

Which of the following statements is true?

Accepted Answer

The correct term for the measure used to measure the change in delta as the underlying security price varies is "gamma," not vega, alpha, or beta. Therefore, none of the listed options are correct.

Question 2

Back-end fees are charged as a certain percentage of:

Accepted Answer

The answer of Back-end fees are charged as a certain...

Question 3

Which of the following contingent risks are most likely to be created if a bank provides a loan commitment?

Accepted Answer

A loan commitment creates potential risks for the bank, including interest rate risk (if the interest rate changes before the loan is disbursed), credit risk (if the borrower cannot repay the loan), draw-down risk (if the borrower decides not to draw down the full amount of the loan), and aggregate funding risk (if the bank cannot secure enough funding to fulfill all of its commitments). Therefore, all of the listed options are correct.

Question 4

Assume a bank has bought a call option on bonds with a notional value of $200.Further assume that and that the delta of the option is calculated at 0.45.What is the contingent asset value (round to two decimals)?

Accepted Answer

The contingent asset value is calculated by multiplying the notional value by the delta, which in this case is $200 * 0.45 = $90.00.

Question 5

Which of the following statements is true?

Accepted Answer

When issued trading refers to the sale of securities that have not yet been issued or delivered. This exposes FIs to future interest rate risk if the interest rates change in the period between the trade and the delivery of the security. This risk arises because the price of the security can fluctuate based on changes in the interest rates. When issued trading does not directly expose FIs to credit risk, liquidity risk, or default risk.

Question 6

Which of the following statements is true?

Accepted Answer

As the time to maturity of the contract increases, so does the likelihood of default. Similarly, as the underlying prices, interest rates, or exchange rates become more volatile, the risk of default increases as well. Therefore, default risk on OTC contracts generally increases with both the time to maturity of the contract and the fluctuation of underlying prices, interest rates, or exchange rates.

Question 7

Assume a bank makes a loan commitment to the value of $10m at a fixed interest rate of 10 per cent p.a.for a period of one year.Assume the borrower only uses 50 per cent of the provided funds over the course of the year.If the bank charges a back-end fee of 0.5 per cent, what is the additional revenue the bank would generate?

Accepted Answer

The bank would earn an interest revenue of $500,000 ($10m * 0.5 * 10%) on the amount that was actually used by the borrower. In addition, the bank would generate a back-end fee of $25,000 ($5m * 0.5%). Therefore, the additional revenue the bank would generate is $525,000 ($500,000 + $25,000).

Question 8

Which of the following statements is true?

Accepted Answer

All the statements provided are correct reasons why the default risk in futures contracts is considered to be less than that of forward contracts. Daily marking to market, margin requirements, and default guarantees by the futures exchange all contribute to reducing the default risk associated with futures contracts compared to forward contracts. Price limits also help manage risk by preventing extreme price fluctuations within a short period.

Question 9

The vega of an option measures:

Accepted Answer

The vega of an option measures the sensitivity of the option's price to changes in implied volatility. It reflects the amount by which the price of the option would be expected to change based on a 1% change in volatility. Therefore, it is a measure of volatility risk.

Question 10

Which of the following statements is true?

Accepted Answer

The answer of Which of the following statements is true?
...

Question 11

Which of the following statements is true?

Accepted Answer

An FI (Financial Institution) that issues a documentary letter of credit on behalf of its customer essentially steps in to guarantee payment to the seller, thereby assuming the credit risk associated with the transaction. This is because the FI commits to paying the seller upon fulfillment of the terms specified in the letter of credit, regardless of the buyer's ability to pay directly.

Question 12

Which of the following is true of an 'adverse material change in conditions clause' used in a loan commitment?

Accepted Answer

An adverse material change in conditions clause allows the financial institution to cancel or reprice a loan commitment if there is a significant change in the borrower's financial condition. It is used as a protection for the lender against unexpected risks. The clause helps the lender to decline the loan or reprice it to adjust the risk. Thus, it does not help defaulted borrowers.

Question 13

Which of the following statements is true?

Accepted Answer

All of the statements are true. Option prices are non-linearly related to the underlying security prices, out-of-the-money call options have exercise prices higher than the underlying security prices, delta method is an approximation and gamma needs to be considered for dealing with non-linearity in option payoffs.

Question 14

Assume a bank grants a loan commitment at an interest rate of 10 per cent p.a.and the risk premium on the loan is 2 per cent.The bank charges borrowers an upfront fee on the whole commitment of 0.25 per cent and a back-end fee on any unused proportion of the loan of 0.5 per cent.The compensating balance is 10 per cent and so are reserve requirements.Assume that the average draw-down of the loan is 80 per cent over the time of the loan commitment.What is the promised return on the loan commitment (round to two decimals)?

Accepted Answer

The answer of Assume a bank grants a loan commitment...

Question 15

Which of the following statements is true?

Accepted Answer

Vega is a measure of an option's sensitivity to changes in volatility. It indicates the amount by which the price of an option is expected to change for every 1% change in volatility. Therefore, statement A is correct. Statement B is incorrect because omega is not a measure of volatility risk. Statement C is partially incorrect because delta is a measure of an option's sensitivity to changes in the underlying asset's price, not volatility. Statement D is incorrect because alpha is not a measure of volatility risk either.

Question 16

Which of the following is a reason why the default risk of a futures contract is assumed to be less than that of a forward contract?

Accepted Answer

Margin requirements on futures help mitigate default risk as they require both parties to have sufficient funds on deposit to cover potential losses. This is not the case with forward contracts, which rely solely on counterparty creditworthiness to ensure delivery and payment at maturity.

Question 17

Settlement in case of 'when issued' (WI) trading must be completed on:

Accepted Answer

Settlement in case of 'when issued' (WI) trading must be completed on Wednesday.

Question 18

Takedown or draw-down risk in a loan commitment exposes the FI to:

Accepted Answer

Takedown or draw-down risk refers to the risk that the borrower may not draw down the entire loan amount committed by the FI, leaving the FI with unutilized funds that may need to be redeployed. This exposes the FI to future liquidity risk, as the FI may have to find alternative investments or funding sources for the unutilized funds.

Question 19

How do you interpret a delta of 0.30?

Accepted Answer

Delta measures the change in price of an option for every one-point change in the price of the underlying asset. A delta of 0.30 means that for every one-cent change in the price of the underlying asset, the price of the option will change by 0.30 cents.

Question 20

Which of the following statements is true?

Accepted Answer

In-the-money call options have a strike price that is lower than the current market value of the underlying asset. Therefore, for the option to be in the money, the price of the underlying security must exceed the option's exercise price. The other options are incorrect.

Quiz 16: Off-Balance-Sheet Activities

Which of the following statements is true?

Back-end fees are charged as a certain percentage of:

Which of the following contingent risks are most likely to be created if a bank provides a loan commitment?

Assume a bank has bought a call option on bonds with a notional value of $200.Further assume that and that the delta of the option is calculated at 0.45.What is the contingent asset value (round to two decimals) ?

Which of the following statements is true?

Which of the following statements is true?

Which of the following statements is true?

The vega of an option measures:

Which of the following statements is true?

Which of the following statements is true?

Which of the following is true of an 'adverse material change in conditions clause' used in a loan commitment?

Which of the following statements is true?

Which of the following statements is true?

Which of the following is a reason why the default risk of a futures contract is assumed to be less than that of a forward contract?

Settlement in case of 'when issued' (WI) trading must be completed on:

Takedown or draw-down risk in a loan commitment exposes the FI to:

How do you interpret a delta of 0.30?

Which of the following statements is true?