fin460 final

0,40 10,-20 20, -40 30, -10 40,10 slope of 4 beyond x= 40

0,40 10,-20 20, -40 30, -10 40,10 slope of 4 beyond x= 40

co

15.843, 5%

cu

24.193

cuu

36.571

cd

4.039, 30%

cud

6.786

Operational Risk is the risk that: (TEST) a. Risk that technology, auditing, monitoring and support systems may malfunction or break down b. Employee fraud and errors, including reputational risk c. Inadequate or failed internal processes, people or systems d. All of the above

D. all the above

The Intrinsic value of an option is the value if exercisable/in the money. It is the difference between market value of underlying asset and the strike price

MARKET VALUE = TRUE

A derivative's underlying variable can be a stock, bond or commodity prices only a.True b. False

false

An entity is insolvent when liabilities fall below assets a. True b. False

false

Banks have more reinvestment risk

false

Each option contract entitles the option short position to buy (call) or sell (put) 100 shares of the underlying stock upon expiration a. True b. False

false

Foreign exchange risk can be fully hedged by matching maturities of assets and liabilities a. True b. False

false

Government securities, or treasuries are risk free a.True b.False

false

Maturity GAP = zero

false

Repricing gap is the difference between rate sensitive assets and rate sensitive liabilities

false

The exercise price is the buy price if the European put option is exercised. a. True b. False

false

Forwards are highly standardized, traditionally traded on an exchange, and marked to market daily. a.True b..False

false forwards are not standard

When interest rates are expected to increase, the market value of equity will decrease if the duration gap is positive

false market value

A put option gives the short position the right to sell at a certain price a. True b. False

false, LONG position

Each option contract entitles the option short position to buy (call) or sell (put) 100 shares of the underlying stock upon expiration a. True b. False

false, long

Derivatives should be used to(TEST) a. Hedge and arbitrage b. Hedge, arbitrage and speculate when it increases share price c. Hedge only d. "Weapons of mass destruction should be avoided" or it will be dangerous

hedge and arbitrage

2 major types of risk

interest and credit

off balance

off balance

An American option can be exercised at any time during its life, which makes it more valuable than the European option that can only be exercised at expiration a. True b. False

true

An option is in the money when it is valuable for the long position to exercise it. a. True b. False

true

Caps and floors are similar to call and put options but on interest rates rather than on bond prices a. True b. False

true

For most banks the maturity and duration gaps are positive(TEST)

true

Futures/Forwards Give the holder (long position) the OBLIGATION to buy or sell at a certain price. Options Give the holder (long position) the RIGHT to buy or sell at a certain price

true

If there is fear of inflation and interest rates are expected to rise (prices of bonds fall) the hedging strategies would consider buying put options and selling (shorting) calls and futures

true

Market Risk is the risk the market value of an outstanding loan may change due to changes in interest rate or currency exchange (TEST) a. True b. False

true

Option premium is the intrinsic value and time value a.True b.False

true

Option premium is the price paid for the option a.True b.False

true

Reinvestment risk returns on reinvested assets fall below cost of funds. It arises when maturity of assets is shorter than maturity of liabilities (TEST)

true

Swaps can be described as a portfolio of forward contracts(TEST) a. True b. False

true

The higher the Altman Z-score the lower the "probability" of borrower default, the lower the credit risk measure

true

The party that buys has long position(TEST) A party that sells has a (short) position(TEST)

true

When interest rates are expected to increase, net interest income will decrease if GAP is negative.

true

duration model examines the impact of interest rate changes on the overall market value/net worth of a financial institution (FI) (TEST)

true

forwards are more popular b/c they're lenient

true