1)Imaginary State Bank holds just two assets: (1) a loan with market value of $500,000,

having duration of 2 years, and (2) a loan with market value of $250,000, having duration

of 4 years. Find the duration of this bank's asset portfolio.

A. 2.67

B. 3.00

C. 1.00

D. 6.00

E. 2.00

(2)A bank anticipates it will need to borrow funds in the Eurodollar market in the future.It hedges by selling futures contracts.If rates decline, which of the following is true?

A.The bank will profit on the futures contract.

B.The bank will profit in the cash market.

C.The bank will have locked in a low cost of borrowing.

D.The bank will lose in the cash market.

E.a. and d.

(3)In the "liquidity index" measurement scheme, which of the following is/are true?

A.The index is higher if the bank's assets are more liquid.

B.The index is higher if the bank's assets are less liquid.

C.The index is higher if immediate asset liquidation requires lower prices.

D.A and C

E.B and C

(4)If interest rates are expected to rise,

A.A bank with gap ratio equal to zero is likely to experience no change in its net interest

income.

B.A liability sensitive bank is likely to experience a rise in its net interest income.

C.An asset sensitive bank is likely to experience a rise in its net interest income.

D.A liability sensitive bank is likely to experience a rise in its net interest income while

an asset sensitive bank is likely to experience a fall in its net interest income.

E.A and C

(3)An unexpected decrease in market yields will adversely affect the cash flows of bonds

held to maturity due to:

A.Price risk.

B.Changes in the market value of the bond.

C.Reinvestment risk.

D.All of the above.

E.None of the above

(6)A portfolio manager with a portfolio heavily invested in bonds might consider a hedge in

expectation of future interest rate increases. Such a hedge would appropriately include a:

A.Put option on Treasury bonds.

B.Put option on Treasury bond futures contracts.

C.Call option on Treasury bond futures contracts.

D.Call option on Treasury bond futures.

E.Both (a) and (b) are correct.

(7)The basis on a futures contract is defined as:

A.the cash price minus the forward price.

B.the forward price minus the cash price.

C.the futures price minus the cash price.

D.the cash price minus the futures price.

E.None of the above.

Discuss the following issues:

(a)What is transfer pricing?

(b)The objectives of transfer pricing;

(c)The methods of transfer pricing; and

(d)The role of treasury operation in the process.