978-0133427073 Test Bank Chapter 24 Part 3

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75) 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.

76) One advantage of using swaps to eliminate interest-rate risk is that swaps

A) are less costly than futures.

B) are less costly than rearranging balance sheets.

C) are more liquid than futures.

D) have better accounting treatment than options.

77) 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.

78) As compared to a default on the notional principle, a default on a swap

A) is more costly.

B) is about as costly.

C) is less costly.

D) may cost more or less than default on the notional principle.

79) Intermediaries are active in the swap markets because

A) they increase liquidity.

B) they reduce default risk.

C) they reduce search cost.

D) all of the above are true.

80) A valid concern about financial derivatives is that

A) they allow financial institutions to increase their leverage.

B) they are too sophisticated because they are so complicated.

C) the notional amounts can greatly exceed a financial institution’s capital.

D) all of the above are valid concerns.

E) none of the above are valid concerns.

81) The biggest danger of financial derivatives occurs

A) when notional amounts exceed a bank’s capital.

B) when financial market prices and rates are highly volatile.

C) in the trading activities of financial institutions.

D) in the large amount of credit exposure.

82) The use of financial derivatives by financial institutions to hedge can decrease risk.

However, they can also increase risk. Which of the following examples illustrates this?

A) Financial derivatives allow financial institutions to increase their leverage.

B) Some institutions such huge amounts of derivatives that the amounts exceed capital.

C) All of the above are valid examples.

D) None of the above are valid examples.

83) Future options are particularly useful for offsetting risk created when a bank ________.

A) extends option-like commitments to bank customers

B) has the right to borrow at a fixed-rate in the future

C) has a loan portfolio of primarily fixed-rate loan products

D) is involved in gold and other inflation-hedging instruments

84) 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) A forward contract is more flexible than a futures contract.

2) Futures contracts are standardized.

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

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

5) One problem with a futures contract is finding a counterparty.

6) Futures contracts are subject to default risk.

7) Futures trading is regulated by the Commodity Futures Trading Commission.

8) Open interest allows investors to change the interest rate on futures contracts.

9) To reduce the interest-rate risk of holding a portfolio of bonds, Treasury bond futures

contracts should be bought.

10) To reduce foreign exchange risk from selling goods to a foreign country, futures contracts

should be sold.

11) An option that gives the holder the right to buy an asset in the future is a put.

12) Option premiums increase as the term to maturity increases.

13) Option premiums fall as the volatility of the underlying asset falls.

14) Using options to control interest-rate risk reduces the chance of a loss but increases the

chance of a gain.

15) One advantage of using options to hedge is that the accounting transaction will never require

the firm to show large unrecognized losses.

16) Interest-rate swaps involve the exchange of a set of payments in one currency for a set of

payments in another.

17) Currency swaps involve the exchange of a set of payments on one currency for a set of

payments in another.

18) If Friendly Finance Company has more rate-sensitive assets than rate-sensitive liabilities, it

may reduce risk with a swap.

19) Interest-rate swaps are more liquid than futures contracts.

20) Intermediaries add value to the swap markets by reducing default risk.

21) The global financial crisis illustrates that derivatives cannot be used to hedge — financial

institutions should be barred from using them in any form.

1) Distinguish between forward and futures contracts.

Topic: Chapter 24.3 Financial Futures Markets