Financial Markets & Institutions Final
Exam Latest Update
Stock options can be used by speculators to benefit from their expectations and by
financial institutions to reduce their risk.
(True/False) - ANSWER True
Financial futures contracts on stock indexes are referred to as interest rate futures.
(True/False) - ANSWER False
Financial futures contracts are rarely sold over the counter.
(True/False) - ANSWER False
Put options are more typically used to hedge when portfolio managers are mainly
concerned about a temporary decline in a stock's value.
(True/False) - ANSWER True
Interest rate swaps are rarely used by companies that issue bonds.
(True/False) - ANSWER False
Commercial banks can be a lender or a borrower when using repurchase agreements
and loans in the federal funds market.
(True/False) - ANSWER True
A bank's sources of funds represent liabilities or equity of the bank.
(True/False) - ANSWER True
The bank holding company structure allows more flexibility to borrow funds, issue
stock, repurchase the company's own stock, and acquire other firms.
(True/False) - ANSWER True
Bank regulators are concerned that banks may maintain a higher level of capital than
they should and have therefore imposed capital requirements on them.
(True/False) - ANSWER False
Banks want to make as many loans as possible. But regulators want to contain the
banks' risk exposure, so the banks are required to have 8-10% capital to cover liability.
, Proprietary trading is generally less risky than a bank's lending operations.
(True/False) - ANSWER False
Interest rate swap - ANSWER An arrangement whereby one party exchanges one set of
interest payments for another.
The bank receives a transaction fee for its services.
-- most common arrangement: fixed-rate interest payments are exchanged for
floating-rate interest payments overtime
Provisions of an interest-rate swap - ANSWER - the notion principle value to which the
interest rates are applied to determine the interest payments involved
- the fixed interest rate
- the formula and type of index used to determine the floating rate
- the frequency of payments, such as every 6 months to a year
- the lifetime of the swap
plain vanilla swap - ANSWER Fixed-rate payments are periodically exchanged for
floating-rate payments.
Also known as the "fixed-for-floating swap"
Two scenarios considered in FFF swap:
1. a consistent rise in market interest rates
2. a consistent decline in market interest rates
The market for swaps is facilitated by over-the-counter trading rather than trading on an
organized exchange.
callable swap option - ANSWER - gives the party making the FIXED payments the right to
terminate the swap prior to its maturity
- PRO: allows the fixed-rate payer to avoid exchanging future interest payments if it
desires
- CON: the party given the right to terminate the swap pays a premium that is reflected in
a higher interest rate than that party would pay without the call feature
putable swap option - ANSWER - gives the party making the FLOATING-RATE payments
the right to terminate the swap
financial futures contract - ANSWER A standardized agreement to deliver or receive a
specified amount of a specified financial instrument at a specified price and date.
Exam Latest Update
Stock options can be used by speculators to benefit from their expectations and by
financial institutions to reduce their risk.
(True/False) - ANSWER True
Financial futures contracts on stock indexes are referred to as interest rate futures.
(True/False) - ANSWER False
Financial futures contracts are rarely sold over the counter.
(True/False) - ANSWER False
Put options are more typically used to hedge when portfolio managers are mainly
concerned about a temporary decline in a stock's value.
(True/False) - ANSWER True
Interest rate swaps are rarely used by companies that issue bonds.
(True/False) - ANSWER False
Commercial banks can be a lender or a borrower when using repurchase agreements
and loans in the federal funds market.
(True/False) - ANSWER True
A bank's sources of funds represent liabilities or equity of the bank.
(True/False) - ANSWER True
The bank holding company structure allows more flexibility to borrow funds, issue
stock, repurchase the company's own stock, and acquire other firms.
(True/False) - ANSWER True
Bank regulators are concerned that banks may maintain a higher level of capital than
they should and have therefore imposed capital requirements on them.
(True/False) - ANSWER False
Banks want to make as many loans as possible. But regulators want to contain the
banks' risk exposure, so the banks are required to have 8-10% capital to cover liability.
, Proprietary trading is generally less risky than a bank's lending operations.
(True/False) - ANSWER False
Interest rate swap - ANSWER An arrangement whereby one party exchanges one set of
interest payments for another.
The bank receives a transaction fee for its services.
-- most common arrangement: fixed-rate interest payments are exchanged for
floating-rate interest payments overtime
Provisions of an interest-rate swap - ANSWER - the notion principle value to which the
interest rates are applied to determine the interest payments involved
- the fixed interest rate
- the formula and type of index used to determine the floating rate
- the frequency of payments, such as every 6 months to a year
- the lifetime of the swap
plain vanilla swap - ANSWER Fixed-rate payments are periodically exchanged for
floating-rate payments.
Also known as the "fixed-for-floating swap"
Two scenarios considered in FFF swap:
1. a consistent rise in market interest rates
2. a consistent decline in market interest rates
The market for swaps is facilitated by over-the-counter trading rather than trading on an
organized exchange.
callable swap option - ANSWER - gives the party making the FIXED payments the right to
terminate the swap prior to its maturity
- PRO: allows the fixed-rate payer to avoid exchanging future interest payments if it
desires
- CON: the party given the right to terminate the swap pays a premium that is reflected in
a higher interest rate than that party would pay without the call feature
putable swap option - ANSWER - gives the party making the FLOATING-RATE payments
the right to terminate the swap
financial futures contract - ANSWER A standardized agreement to deliver or receive a
specified amount of a specified financial instrument at a specified price and date.
