Question 1

Which of the following statements is true?

Accepted Answer

Traditional valuation calculates an FI's net worth as the market value of assets minus the market value of liabilities. This is because the net worth is the residual value of the assets that remains after all liabilities have been paid off.

Question 2

Assume that a bank's market value of assets is $200, the market value of its contingent assets is $50, the market value of its liabilities is $180 and the market value of its contingent liabilities is $60.What is the value of this bank's net worth?

Accepted Answer

Net worth = (Market value of assets + Market value of contingent assets) - (Market value of liabilities + Market value of contingent liabilities)
Net worth = ($200 + $50) - ($180 + $60) = $250 - $240 = $10. Therefore, the value of this bank's net worth is $10.

Question 3

Which of the following statements is true?

Accepted Answer

Option delta measures the sensitivity of an option's price to changes in the price of the underlying security. It is commonly calculated as the change in the option's price divided by the change in the price of the underlying security, holding all other factors constant.

Question 4

Which of the following statements is true?

Accepted Answer

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

Question 5

Which of the following statements is true?

Accepted Answer

A forward contract is a non-standardised contract between two parties where they agree to deliver and pay for an asset at a predetermined price and future date. It is not guaranteed by organised exchanges and is typically customized to meet the specific needs of the parties involved. Choice A and C are incorrect because a forward contract is not standardized or guaranteed by an exchange. Choice D is also incorrect because forward contracts are not guaranteed by exchanges.

Question 6

Which of the following statements is true?

Accepted Answer

Basis risk refers to the risk that the spread between two interest rates or prices will change, affecting the outcome of hedging or investment strategies.

Question 7

An off-balance-sheet asset is an item that:

Accepted Answer

An off-balance-sheet asset is an item that moves on to the asset side of the balance sheet when a contingent event occurs. Examples of such assets include letters of credit, loan commitments, and derivative contracts.

Question 8

The term 'recourse' refers to the ability to put an asset or loan back to the seller should the:

Accepted Answer

Recourse refers to the ability to put an asset or loan back to the seller if the credit quality of that asset deteriorates, making it a risky investment for the buyer. This provides the buyer with some protection against potential losses.

Question 9

The change in the value of an option for a small unit change in the price of the underlying security is called the:

Accepted Answer

The change in the value of an option for a small unit change in the price of the underlying security is called the delta of an option. The delta measures the sensitivity of an option's value to changes in the price of the underlying asset. The other choices, alpha, beta, and gamma, are not used to measure this sensitivity.

Question 10

Which of the following statements is true?

Accepted Answer

Basis risk arises because loan rates and deposit rates are not perfectly correlated in their movements over time. This means that even if an FI may take deposits from customers and make loans to others, the interest rates on these two transactions may not move in tandem, resulting in basis risk. This risk can lead to a mismatch in interest rate risk, affecting the profitability of the FI.

Question 11

Assume that the market value of assets is $120 and the market value of liabilities is $90.What is the bank's net worth?

Accepted Answer

The bank's net worth can be calculated as assets - liabilities which is $120 - $90 = $30. Therefore, the correct answer is B.

Question 12

The delta of an option refers to the change in the value of an:

Accepted Answer

Delta measures how much the option's price will change for a small unit change in the price of the underlying security. A delta of 1 means that the option's price will change by the same amount as the underlying security's price. A delta of 0.5 means that the option's price will change by half as much as the underlying security's price, and so on. Therefore, the delta of an option refers to the change in the value of an option for a small unit change in the price of the underlying security.

Question 13

Which of the following statements is true?

Accepted Answer

Back-end fee is the fee imposed on the unused component of a loan commitment, meaning that it is a fee charged for the portion of the loan that is available but not used. It is typically a percentage of the unused loan amount and is charged at the end of the loan term. The other options are incorrect as they do not accurately describe what a back-end fee is.

Question 14

Including on-balance-sheet and off-balance-sheet activities, a bank's net worth is calculated as:

Accepted Answer

The formula for calculating a bank's net worth includes deducting its liabilities from its assets to get its equity. On-balance-sheet assets include loans, securities, and cash while on-balance-sheet liabilities include deposits and debt. Off-balance-sheet activities include items such as loan commitments and letters of credit. Adding the off-balance-sheet activities to the equity of the bank calculates the bank's net worth. Thus, the correct formula is (A-L) + (CA-CL).

Question 15

A contractual commitment to lend to a firm a certain maximum amount at given interest rate terms is:

Accepted Answer

A loan commitment agreement is a legally binding contract between a lender and a borrower where the lender agrees to lend a certain amount of money to the borrower at a specified interest rate over a predetermined period of time. This differs from a credit line or bond, which may have different terms and conditions.

Question 16

Which of the following are included in commitments and non-market related items?

Accepted Answer

Direct credit substitutes and trade performance related items are typically included in commitments and non-market related items. Swaps, options, and future contracts are not considered commitments and are generally related to market activities.

Question 17

Which of the following are typical off-balance-sheet activities undertaken by Australian banks?

Accepted Answer

Futures contracts and forward contracts, direct credit substitutes, and commitments are all typical off-balance-sheet activities undertaken by Australian banks. Therefore, all of the listed options are correct.

Question 18

Which of the following statements is true?

Accepted Answer

A futures contract is a type of derivative contract in which two parties agree to buy or sell an asset at a predetermined price and date in the future. The contract is standardised, meaning that the specifications of the asset being traded, the delivery date, and the contract size are all predetermined and regulated by organised exchanges. These exchanges also guarantee the contracts, providing assurance that the delivery of the asset and payment will occur as specified in the contract. Therefore, option C is the correct answer.

Question 19

Letters of credit are:

Accepted Answer

Letters of credit are contingent guarantees issued by banks or other financial institutions to ensure that payments will be made on time and in full. They are typically used in international trade to underwrite the performance of the buyer and to reduce risk for the seller. They provide assurance to the seller that they will receive payment for the goods or services they provide, even if the buyer defaults.

Question 20

Contingent assets and liabilities are assets and liabilities off the balance sheet that:

Accepted Answer

Contingent assets and liabilities have the potential to produce positive or negative future cash flows for an FI, but they are not certain. Examples of contingent assets include guarantees from third parties, while examples of contingent liabilities include warranties and lawsuits. These items are not recorded on the balance sheet but may need to be disclosed in the footnotes to the financial statements.

Quiz 16: Off-Balance-Sheet Activities

Which of the following statements is true?

Assume that a bank's market value of assets is $200, the market value of its contingent assets is $50, the market value of its liabilities is $180 and the market value of its contingent liabilities is $60.What is the value of this bank's net worth?

Which of the following statements is true?

Which of the following statements is true?

Which of the following statements is true?

Which of the following statements is true?

An off-balance-sheet asset is an item that:

The term 'recourse' refers to the ability to put an asset or loan back to the seller should the:

The change in the value of an option for a small unit change in the price of the underlying security is called the:

Which of the following statements is true?

Assume that the market value of assets is $120 and the market value of liabilities is $90.What is the bank's net worth?

The delta of an option refers to the change in the value of an:

Which of the following statements is true?

Including on-balance-sheet and off-balance-sheet activities, a bank's net worth is calculated as:

A contractual commitment to lend to a firm a certain maximum amount at given interest rate terms is:

Which of the following are included in commitments and non-market related items?

Which of the following are typical off-balance-sheet activities undertaken by Australian banks?

Which of the following statements is true?

Letters of credit are:

Contingent assets and liabilities are assets and liabilities off the balance sheet that: