Chapter 24 Finance 445
_____ contracts are standardized and traded on organized exchanges. Multiple choice question. Futures Delivery Forward Swap
Futures
______ focuses on mismatches between rate-sensitive assets and rate-sensitive liabilities on the balance sheet, rather than individual assets and liabilities. Multiple choice question. Megahedging Macrohedging Minihedging Microhedging
Macrohedging
True or false: Buying a cap is like buying insurance against an excessive increase in interest rates.
True
True or false: One of the important values of credit default swaps is that they allow FIs to maintain long-term customer lending relationships without bearing the full credit risk exposure from those relationships.
True
True or false: One of the important values of credit default swaps is that they allow FIs to maintain long-term customer lending relationships without bearing the full credit risk exposure from those relationships. True false question. True False
True
True or false: The experience of the financial crisis showed the financial world that credit default swaps are themselves subject to default risk.
True
An FI that has fixed-rate liabilities in a foreign currency is exposed to the risk that the foreign currency may ______ against the FI's home currency, making interest and principal payments in that currency ______ expensive.
appreciate; more
An FI that has fixed-rate liabilities in a foreign currency is exposed to the risk that the foreign currency may ______ against the FI's home currency, making interest and principal payments in that currency ______ expensive. Multiple choice question. appreciate; more depreciate; more appreciate; less depreciate; less
appreciate; more
In an interest rate swap agreement, the party receiving or making the floating-rate payments may be exposed to ______ risk if the index on which the payments are based does not closely track their floating-rate asset or liability.
basis
In an interest rate swap agreement, the party receiving or making the floating-rate payments may be exposed to ______ risk if the index on which the payments are based does not closely track their floating-rate asset or liability. Multiple choice question. interest rate exchange rate basis default
basis
The residual risk that arises because the prices of the assets or liabilities hedged are imperfectly correlated over time with the prices of the forward or futures contracts used to hedge is called Multiple choice question. basis risk. residual risk. hedge risk. leftover risk.
basis risk.
A derivative hedge solution to an interest rate risk exposure caused by a large positive duration gap is to go off the balance sheet and Multiple choice question. buy an interest rate floor. buy an interest rate swap. buy an interest rate cap. sell an interest rate swap.
buy an interest rate swap.
Many FIs ______ rather than ______ options for regulatory reasons.
buy; write
Many FIs ______ rather than ______ options for regulatory reasons. Multiple choice question. buy; write sell; buy buy; sell write; buy
buy; write
The ______ of a credit default swap makes periodic payments to the ______ until the end of the life of the swap or until the credit event specified in the contract occurs.
buyer; seller
Buying a cap to hedge against rising interest rates is like ______ on interest rates. Multiple choice question. buying a put selling a future buying a future buying a call
buying a call
An FI can hedge the interest rate risk exposure of a bond on the liability side of its balance sheet by Multiple choice question. buying a call option on the bond. writing a put option on the bond. writing a call option on the bond. buying a put option on the bond.
buying a call option on the bond
An FI can hedge the interest rate risk exposure of a bond on the liability side of its balance sheet by
buying a call option on the bond.
The payoff of a portfolio consisting of taking a long position on a bond and buying a put on that bond mimics the payoff of Multiple choice question. buying a put option. buying a call option. selling a futures contract. buying a futures contract.
buying a call option.
Buying a floor to hedge against falling interest rates is like ______ on interest rates.
buying a put
An FI can hedge the interest rate risk exposure of a bond on the asset side of its balance sheet by
buying a put option on the bond.
In the event of a default, a credit default swap may be settled by a ______ or ______.
cash payment; delivery of bonds
A ______ occurs when an FI takes a simultaneous position in a cap and a floor.
collar
A ______ occurs when an FI takes a simultaneous position in a cap and a floor. Multiple choice question. strangle swap straddle collar
collar
When FI's take a position as one of the parties to an over-the-counter forward or option contract, they are exposed to
contingent credit risk.
One of the important values of credit default swaps is that they allow FIs to hedge ______ risk, which is more likely to cause an FI to fail than either interest rate risk or foreign exchange risk.
credit
In recent years, the fastest growing types of swaps have been
credit default swaps.
In an interest rate swap agreement, the party receiving or making the floating-rate payments may also be exposed to basis risk if the ______ of their floating-rate assets or liabilities changes over time.
credit risk premium
When an FI fully intermediates between the two parties of a swap agreement, they are accepting the ______ risk exposure and ______ the swap cash flows. Multiple choice question. exchange rate; exchanging default; exchanging interest rate; guaranteeing credit; guaranteeing
credit; guaranteeing
When interest rates ______, the market value of a portfolio of bonds ______. Multiple select question. decrease; increases decrease; decreases increase; increases increase; decreases
decrease; increases increase; decreases
Swaps and forwards are subject to ______ risk, while futures and options are not. Multiple choice question. default currency liquidity sovereign
default
When buying a floor to hedge, if interest rates ______ the floor, then the floor seller compensates the floor buyer in exchange for an up-front premium.
drop below
buying a put option on the bond.
fall
Writing a put option is a strategy to take to make a profit when interest rates are expected to Multiple choice question. fall. remain constant. rise.
fall.
An agreement between two parties to exchange fixed-rate payments in different currencies at a fixed, agreed-upon exchange rate is called a(n)
fixed-fixed currency swap.
The buyer of an interest rate swap makes ______ payments, and the seller makes ______ payments.
fixed-rate; floating-rate
The buyer of an interest rate swap makes ______ payments, and the seller makes ______ payments. Multiple choice question. fixed-rate; floating-rate large; small small; large floating-rate; fixed-rate
fixed-rate; floating-rate
A contractual agreement between a buyer and a seller to exchange an asset for cash at a specified later date for a specified price is called a Multiple choice question. delivery contract. forward contract. swap contract. spot contract.
forward contract.
Conceptually, a swap is a succession of ______ contracts.
forward rate
If a bond portfolio manager expects interest rates to rise, he or she can use a ______ contract to ______ bonds at a future date at a price specified today to offset the capital loss on the bond portfolio. Multiple choice question. swap; buy swap; sell forward; buy forward; sell
forward; sell
A ______ hedge produces symmetric gains and losses with interest rate increases and decreases.
futures
A ______ hedge produces symmetric gains and losses with interest rate increases and decreases. Multiple choice question. put option forward futures call option
futures
Unlike over-the-counter forward contracts, exchange-traded ______ have less default risk because of exchange guarantees and daily marking to market.
futures
An agreement between a buyer and a seller to exchange a standardized, prespecified asset for cash at a specified later date is called a Multiple choice question. futures contract. forward contract. swap contract. spot contract.
futures contract.
A forward contract lets a market participant ______ the risk that future spot prices will move against him or her by guaranteeing a future price for the asset today. Multiple choice question. monitor remove hedge increase
hedge
If the forward hedge on a bond portfolio reduced the net interest rate exposure to zero, we say it has ______ the portfolio against interest rate risk. Multiple choice question. blocked immunized inoculated shielded
immunized
A counterparty to an over-the-counter forward or option contract is most likely to default when the counterparty is losing heavily on the contract and the FI is ______ on the contract.
in the money
A counterparty to an over-the-counter forward or option contract is most likely to default when the counterparty is losing heavily on the contract and the FI is ______ on the contract. Multiple choice question. out of the money at the money in the money past the money
in the money
Unlike currency swaps, interest rate swaps involve the exchange of ______ payments only, measured against some notional principal value.
interest
Unlike currency swaps, interest rate swaps involve the exchange of ______ payments only, measured against some notional principal value. Multiple choice question. interest and principal interest principal
interest
Two FIs that have opposing balance sheet and interest rate risk exposure are good candidates for a(n)
interest rate swap.
Two FIs that have opposing balance sheet and interest rate risk exposure are good candidates for a(n) Multiple choice question. interest rate swap. forward contract. option contract. futures contract.
interest rate swap.
The default risk on a swap involves the loss of ______ only, while the default risk on a loan involves loss of ______.
interest; interest and principal
Unlike macrohedging, microhedging ignores the ______ that already exist on the balance sheet. Multiple choice question. external hedges asset prices internal hedges liability prices
internal hedges
If an FI stands to lose on the balance sheet when interest rates fall, then the appropriate hedge is a ______ position in Eurodollar futures. Multiple choice question. long hedged temporary short
long
If an FI stands to lose on the balance sheet when interest rates fall, then the appropriate hedge is a ______ position in Eurodollar futures. Multiple choice question. long short hedged temporary
long
Swap and forward contracts can be written for ______, while futures and options are generally written for ______.
long periods; short periods
Swap and forward contracts can be written for ______, while futures and options are generally written for ______. Multiple choice question. short periods; long periods long periods; short periods large amounts; small amounts small amounts; large amounts
long periods; short periods
When using a forward contract as a bond portfolio hedge against rising interest rates, the ______ on the bond portfolio is partially or completely offset by the ______ on the forward contract. Multiple choice question. loss; gain loss; loss gain; loss gain; gain
loss; gain
The credit risk on a swap is ______ the credit risk on a loan of equivalent dollar size.
lower than
An FI is ______ when it employs a derivative securities contract to hedge a particular asset or liability risk. Multiple choice question. megahedging macrohedging microhedging minihedging
microhedging
The hedge of a cash asset on a direct dollar-for-dollar basis with a forward or futures contract is called a Multiple choice question. sophisticated hedge. naive hedge. native hedge. rate hedge.
naive hedge.
The writing of ______ options is considered to be especially risky by regulators.
naked
The writing of ______ options is considered to be especially risky by regulators. Multiple choice question. regular naked put covered
naked
A financial institution that finances short-term floating rate assets with medium-term fixed rate liabilities will experience a ______ duration gap.
negative
Netting of payments implies that the default exposure of the in-the-money party is limited to the ______ rather than either the total fixed or floating payment itself.
net payment
When on each swap payment date, one party makes a single payment to the other party for the net difference between the fixed and floating payments, it is referred to as
netting of payments.
When on each swap payment date, one party makes a single payment to the other party for the net difference between the fixed and floating payments, it is referred to as Multiple choice question. payment exchange. payment adjustment. netting of payments. payment hedging.
netting of payments.
Using a pure credit swap, if an FI lender's loan defaults, the counterparty will cover the default loss by making a payment equal to the ______ value minus the ______ value of the defaulted loan.
par; secondary market
A standard fixed-for-floating interest rate swap agreement without any special features is referred to as a ______ swap.
plain vanilla
A standard fixed-for-floating interest rate swap agreement without any special features is referred to as a ______ swap. Multiple choice question. one-for-one simple double plain vanilla
plain vanilla
An alternative swap that is similar to a total return swap with the interest rate sensitive element stripped out is the
pure credit swap.
A ______ hedge on a bond is an asymmetric hedge that limits losses on the bond when interest rates rise, but allows the investor to enjoy the gains associated with falling interest rates.
put option
A balance sheet solution to an interest rate risk exposure caused by a large negative or positive duration gap is to Multiple choice question. refinance to increase the gap. use only deposits for funding. use only fixed-rate debt for funding. refinance to reduce the gap.
refinance to reduce the gap.
A derivative hedge solution to an interest rate risk exposure caused by a large negative duration gap is to go off the balance sheet and
sell an interest rate swap.
If an FI stands to lose on the balance sheet when interest rates rise, then the appropriate hedge is a ______ position in Eurodollar futures. Multiple choice question. short hedged temporary long
short
If an FI stands to lose on the balance sheet when interest rates rise, then the appropriate hedge is a ______ position in Eurodollar futures. Multiple choice question. short temporary long hedged
short
A writer of a covered call option on a bond (does own the bond) faces potentially ______ when interest rates rise.
significant losses
A writer of a covered call option on a bond (does own the bond) faces potentially ______ when interest rates rise. Multiple choice question. moderate gains significant losses unlimited losses small losses
significant losses
Futures and many options are ______ contracts which have a fixed principal and maturity date. Multiple choice question. standardized over-the-counter broker-created dealer-created
standardized
When a swap agreement is made between two parties of different credit standings, the poorer quality credit risk party may be required to purchase a(n) ______ from an AAA-rated financial institution.
standby letter of credit
When a swap agreement is made between two parties of different credit standings, the poorer quality credit risk party may be required to purchase a(n) ______ from an AAA-rated financial institution. Multiple choice question. forward contract credit default swap offsetting swap standby letter of credit
standby letter of credit
A ______ swap involves swapping an obligation to pay interest at a specified fixed or floating rate for payments representing the total return on a loan or bond of a specified amount.
total return
A ______ swap involves swapping an obligation to pay interest at a specified fixed or floating rate for payments representing the total return on a loan or bond of a specified amount. Multiple choice question. total return credit default partial return credit change
total return
A ______ swap is used to hedge against an unexpected change in the credit risk of a counterparty to a loan or bond.
total return
A ______ swap is used to hedge against an unexpected change in the credit risk of a counterparty to a loan or bond. Multiple choice question. credit default total return credit change partial return
total return
A writer of a naked call option on a bond (does not own the bond) faces potentially ______ when interest rates fall.
unlimited losses
A writer of a naked call option on a bond (does not own the bond) faces potentially ______ when interest rates fall. Multiple choice question. unlimited losses moderate gains significant losses small losses
unlimited losses
The ______ of a call option on a bond is taking a ______ position in the call option. Multiple choice question. writer; short buyer; short seller; long writer; long
writer; short
