1. If a bank has a gap of -$10 million, it can reduce its interest-rate risk by

A) paying a fixed rate on $10 million and receiving a floating rate on $10 million.

B) paying a floating rate on $10 million and receiving a fixed rate on $10 million.

C) selling $20 million fixed-rate assets.

D) buying $20 million fixed-rate assets.

1. The disadvantage of swaps is that

A) they lack liquidity.

B) it is difficult to arrange for a counterparty.

C) they suffer from default risk.

D) they are all of the above.

1. If a financial institution uses stock index futures to completely hedge the systematic component of its stock portfolio, the resulting portfolio will have a beta close to

A) 0.00.

B) 1.00.

C) 2.00.

D) 0.50.

1. An interest-rate swap involves the exchange of one set of interest payments for another set of interest payments, and typically specifies all of the following, except

A) the interest rate on the payments that are being exchanged

B) the type of interest payments

C) the strike, or exercise, price

D) the notional principal

1. If Second National Bank has more rate-sensitive assets than rate-sensitive liabilities, it can reduce interest-rate risk with a swap which requires Second National to

A) pay a fixed rate while receiving a floating rate.

B) receive a fixed rate while paying a floating rate.

C) both receive and pay a fixed rate.

D) both receive and pay a floating rate.

1. If a bank manager wants to protect the bank against losses that would be incurred on its portfolio of Treasury securities should interest rates rise, he could ________ options on financial futures.

A) buy put

B) buy call

C) sell put

D) sell call

1. All other things held constant, premiums on both put and call options will increase when the

A) exercise price increases.

B) volatility of the underlying asset increases.

C) term to maturity decreases.

D) futures price increases.

Answer: B

1. If you buy an option to sell Treasury futures at 110, and at expiration the market price is 115,

A) the call will be exercised.

B) the put will be exercised.

C) the call will not be exercised.

D) the put will not be exercised.

1. The seller of an option has the ________ to buy or sell the underlying asset, while the purchaser of an option has the ________ to buy or sell the asset.

A) obligation; right

B) right; obligation

C) obligation; obligation

D) right; right

1. If a firm is due to be paid in euros in two months, to hedge against exchange rate risk the firm should

A) sell foreign exchange futures short.

B) buy foreign exchange futures long.

C) stay out of the exchange futures market.

D) do none of the above.

True/False

1. A long contract obligates the holder to sell securities in the future.

1. A short contract obligates the holder to sell securities in the future.

1. A forward contract is more flexible than a futures contract.

1. Hedging risk involves engaging in a financial transaction that offsets a long position by taking an additional long position.

1. Futures contracts are standardized.