EC 380 UPDATED EXAMS SCRIPT ALL QUESTIONS
AND ANSWERS SURE A+
✔✔Liquidity Premium Theory - ✔✔Adds a term premium to explain upward-sloping yield
curves.
✔✔Off-balance-sheet (OBS) item - ✔✔Contingent asset or liability not recorded on the
balance sheet.
✔✔True net worth - ✔✔E = (A − L) + (Contingent Assets − Contingent Liabilities).
✔✔Loan commitment - ✔✔Contractual right for a borrower to draw funds up to a limit at
pre-agreed terms.
✔✔Upfront fee - ✔✔Fee charged at the beginning of a loan commitment.
✔✔Back-end fee - ✔✔Fee charged on the unused portion of a loan commitment.
✔✔Interest rate risk in loan commitments - ✔✔Rates may rise above the committed
lending rate.
✔✔Takedown risk - ✔✔Uncertainty over when borrowers draw down committed funds.
, ✔✔Credit risk in loan commitments - ✔✔Borrower's credit quality may deteriorate
before drawdown.
✔✔Aggregate funding risk - ✔✔Many borrowers draw down simultaneously during
crises.
✔✔Adverse Material Change (AMC) clause - ✔✔Allows FI to cancel/reprice a
commitment if borrower condition deteriorates.
✔✔Commercial letter of credit (LC) - ✔✔Bank guarantee used in international trade.
✔✔Standby letter of credit (SLC) - ✔✔Guarantee for performance or payment
obligations.
✔✔Delta equivalent - ✔✔Delta × face value.
✔✔Forward contract - ✔✔OTC agreement to buy/sell at a future date; default risk
exists.
✔✔Futures contract - ✔✔Standardized exchange-traded contract marked to market
daily.
✔✔Option - ✔✔Contract giving the holder the right but not obligation to buy/sell an
asset.
✔✔Swap - ✔✔Agreement to exchange cash flows based on a notional amount.
✔✔Spot contract - ✔✔Immediate delivery and payment at current market price.
✔✔Long futures position - ✔✔Profits when rates fall and bond prices rise.
✔✔Short futures position - ✔✔Profits when rates rise and bond prices fall.
✔✔Macrohedging - ✔✔Hedging the entire balance-sheet duration gap.
✔✔Microhedging - ✔✔Hedging a single asset or liability.
✔✔Basis risk - ✔✔Imperfect correlation between hedge instrument and exposure.
✔✔NF formula - ✔✔NF = −(DA − k·DL) × A / (DF × PF).
✔✔Credit forward - ✔✔Derivative compensating for widening credit spreads.
AND ANSWERS SURE A+
✔✔Liquidity Premium Theory - ✔✔Adds a term premium to explain upward-sloping yield
curves.
✔✔Off-balance-sheet (OBS) item - ✔✔Contingent asset or liability not recorded on the
balance sheet.
✔✔True net worth - ✔✔E = (A − L) + (Contingent Assets − Contingent Liabilities).
✔✔Loan commitment - ✔✔Contractual right for a borrower to draw funds up to a limit at
pre-agreed terms.
✔✔Upfront fee - ✔✔Fee charged at the beginning of a loan commitment.
✔✔Back-end fee - ✔✔Fee charged on the unused portion of a loan commitment.
✔✔Interest rate risk in loan commitments - ✔✔Rates may rise above the committed
lending rate.
✔✔Takedown risk - ✔✔Uncertainty over when borrowers draw down committed funds.
, ✔✔Credit risk in loan commitments - ✔✔Borrower's credit quality may deteriorate
before drawdown.
✔✔Aggregate funding risk - ✔✔Many borrowers draw down simultaneously during
crises.
✔✔Adverse Material Change (AMC) clause - ✔✔Allows FI to cancel/reprice a
commitment if borrower condition deteriorates.
✔✔Commercial letter of credit (LC) - ✔✔Bank guarantee used in international trade.
✔✔Standby letter of credit (SLC) - ✔✔Guarantee for performance or payment
obligations.
✔✔Delta equivalent - ✔✔Delta × face value.
✔✔Forward contract - ✔✔OTC agreement to buy/sell at a future date; default risk
exists.
✔✔Futures contract - ✔✔Standardized exchange-traded contract marked to market
daily.
✔✔Option - ✔✔Contract giving the holder the right but not obligation to buy/sell an
asset.
✔✔Swap - ✔✔Agreement to exchange cash flows based on a notional amount.
✔✔Spot contract - ✔✔Immediate delivery and payment at current market price.
✔✔Long futures position - ✔✔Profits when rates fall and bond prices rise.
✔✔Short futures position - ✔✔Profits when rates rise and bond prices fall.
✔✔Macrohedging - ✔✔Hedging the entire balance-sheet duration gap.
✔✔Microhedging - ✔✔Hedging a single asset or liability.
✔✔Basis risk - ✔✔Imperfect correlation between hedge instrument and exposure.
✔✔NF formula - ✔✔NF = −(DA − k·DL) × A / (DF × PF).
✔✔Credit forward - ✔✔Derivative compensating for widening credit spreads.
