FRM Final Exam 031211
FRM Final Exam
Student: ___________________________________________________________________________
1. If the loans in the bank's portfolio are all negatively correlated, what will be the impact on the bank's
credit risk exposure?
A. The loans' negative correlations will increase the bank's credit risk exposure because lower than
expected returns on some loans will be offset by higher than expected returns on other loans.
B. There is no impact on the bank's credit risk exposure.
C. The loans' negative correlations will increase the bank's credit risk exposure because higher returns
on less risky loans will be offset by lower returns on riskier loans.
D. The loans' negative correlations will decrease the bank's credit risk exposure because lower than
expected returns on some loans will be offset by higher than expected returns on other loans.
E. The loans' negative correlations will decrease the bank's credit risk exposure because higher returns
on less risky loans will be offset by lower returns on riskier loans.
2. At some point, further increases in interest rates on specific loans may decrease expected loan returns
because of increased probability of default by the borrower.
True False
3. Covenants are restrictions in loan and bond agreements that encourage or forbid certain actions by the
borrower.
True False
4. Demand deposits pose a liquidity risk for FIs because funds may be withdrawn at any time.
True False
5. Revolving loans are credit lines
A. whose interest rate adjusts with movements in an underlying market index interest rate.
B. that include new and used automobile loans, mobile home loans, and fixed-term consumer loans.
C. that specify a maximum size and a maximum period of time over which the borrower can withdraw
funds.
D. on which a borrower can both draw and repay many times over the life of the loan contract.
E. that allow the borrower to borrow the repeat credit only after the first loan is repaid.
6. An FI's most liquid asset is cash.
True False
7. Which term defines the risk related to the uncertainty of an FI's earnings on its trading portfolio caused
by changes, and particularly extreme changes in market conditions?
A. Default risk.
B. Credit risk.
C. Interest rate risk.
D. Market risk.
E. Sovereign risk.
8. The on-the-run yield curve of U.S. Treasury securities is the yield curve for outstanding, previously
issued securities.
True False
9. The risk that borrowers are unable to repay their loans on time is
A. sovereign risk.
B. interest rate risk.
C. credit risk.
D. currency risk.
E. liquidity risk.
The mean change in the value of a portfolio of trading assets has been estimated to be 0 with a standard deviation of 20 percent. Yield changes are assumed to be normally distributed.
10. What is the maximum yield change expected if a 99 percent confidence (one-tailed) limit is used?
A. 20.0%.
B. 3.30%.
C. 39.2%.
D. 33.0%.
E. 46.6%.
11. What is the maximum yield change expected if a 90 percent confidence (one-tailed) limit is used?
A. 20.0%.
B. 39.2%.
C. 46.6%.
D. 3.30%.
E. 33.0%.
12. The risk that foreign governments may devalue their exchange rates is:
A. liquidity risk.
B. credit risk.
C. sovereign risk.
D. currency risk.
E. interest rate risk.
13. Which of the following is NOT a potential causes of liquidity risk for a DI?
A. An increase in requests by depositors to withdrawal large amounts of deposits.
B. A decrease in the DI's stock price caused by market factors.
C. A decrease in asset prices of securities held in the investment portfolio.
D. An increase in requests to fund large amounts of loan commitments.
E. A decrease in the availability of short-term borrowed funds.
14. Which of the following loan applicant characteristics is not relevant in the credit approval decision?
A. Leverage position of the borrower.
B. Borrower income.
C. Value of collateral.
D. Borrower reputation.
E. None of the above.
15. The risk that a debt security's price will fall, subjecting the investor to a potential capital loss is
A. currency risk.
B. credit risk.
C. liquidity risk.
D. market risk.
E. political risk.
16. A bank has assets of $500,000,000 and equity of $40,000,000. The assets have an average duration of 5.5
years, and the liabilities have an average duration of 2.5 years. An 8-year fixed-rate T-bond with the same coupon as the fixed-rate on the swap has a duration of 6 years, and the duration of a floating-rate bond that reprices annually is one year. The bank wishes to hedge its balance sheet with swap contracts that have notional contracts of $100,000. What is the optimal number of swap contracts into which the bank should enter?
A. 2,500 contracts.
B. 2,760 contracts.
C. 13,800 contracts.
D. 3,200 contracts.
E. None of the above.
17. A naive hedge occurs when
A. an FI manager wishes to use futures or other derivative securities to hedge the entire balance sheet
duration gap.
B. a cash asset is hedged on a direct dollar-for-dollar basis with a forward or futures contract.
C. an FI reduces its interest rate or other risk exposure to the lowest possible level by selling sufficient
futures to offset the interest rate risk exposure of its whole balance sheet.
D. an FI purchases an insurance cover to the extent of 80% of losses arising from adverse movement in
asset prices.
E. All of the above.
A thrift has funded 10 percent fixed-rate assets with variable-rate liabilities at LIBOR + 2 (L+2) percent. A bank has funded
variable-rate assets with fixed-rate liabilities at 6 percent. The bank's variable-rate assets earn LIBOR + 1 (L+1) percent. The thrift and the bank have reached agreement on an interest-rate swap with the fixed-rate swap payment at 6 percent and the variable-rate swap payment at LIBOR.
18. Assume that the thrift variable-rate liabilities are CDs indexed to some domestic rate. Which of the
following statements describes the hedge characteristics of the above example?
A. The thrift is exposed to basis risk because the CD rates may not be perfectly correlated with the
LIBOR rates.
B. Only the bank is fully hedged.
C. The thrift is exposed to basis risk if the credit/default risk premium on the thrift's CDs increases over
time.
D. All of the above.
E. Answers A and C only.
19. Assume that the swap is for two years and that LIBOR is 5.25 percent in year one and 6.25 percent in
year two. What will be the net swap cash flow each year if the notional value of a swap is $100 million?
A. The thrift pays $0.75 million to the bank in year one and receives $0.25 million from the bank in year
two.
B. The thrift receives $0.75 million from the bank in year one and pays $0.25 million to the bank in year
two.
C. The thrift pays $0.25 million to the bank in year one and receives $0.75 million from the bank in year
two.
D. The thrift receives $0.25 million from the bank in year one and pays $0.75 million to the bank in year
two.
E. None of the above.
20. What will be the net after-swap cost of funds for the thrift if the cash market liabilities are included in the
analysis?
A. Variable-rate at LIBOR.
B. Fixed-rate at 8 percent.
C. Fixed-rate at 1 percent.
D. Fixed-rate at 2 percent.
E. None of the above.
21. What will be the net after-swap yield on assets for the thrift?
A. Variable-rate at LIBOR.
B. Fixed-rate at 8 percent.
C. Fixed-rate at 1 percent.
D. Fixed-rate at 2 percent.
E. None of the above.
22. What will be the net after-swap yield on assets for the bank?
A. Variable-rate at LIBOR.
B. Fixed-rate at 8 percent.
C. Fixed-rate at 1 percent.
D. Fixed-rate at 2 percent.
E. None of the above.
23. What will be the net after-swap cost of funds for the bank if the cash market liabilities are included in the
analysis?
A. Variable-rate at LIBOR.
B. Fixed-rate at 8 percent.
C. Fixed-rate at 1 percent.
D. Fixed-rate at 2 percent.
E. None of the above.
24. Routine hedging
A. is a strategy used when interest rates are extremely unpredictable.
B. always results in excess returns.
C. is a strategy to follow when interest rates are abnormally low.
D. is a strategy to follow when interest rates are abnormally high.
E. is a hedging strategy that occurs on a set, predetermined basis by the FI.
25. How can market risk be defined in absolute terms?
A. The change in value of an FI's assets and liabilities denominated in nondomestic currencies.
B. A dollar exposure amount or as a relative amount against some benchmark.
C. The capital required to offset a sudden decline in the value of its assets.
D. The cost incurred by an FI when its technological investments do not produce anticipated cost
savings.
E. The gap between promised cash flows from loans and securities and realized cash flows.
26. Recessionary phases in the business cycle typically cause greater hardship on companies that borrow
large amounts.
True False
27. Banks are limited by regulation to using the historic or back simulation method to quantify market risk
exposure.
True False
28. A U.S. bank has €40 million in assets and €50 million in CDs. All other assets and liabilities are in U.S.
dollars. This bank is
A. net long €10 million.
B. net short €10 million.
C. neither short nor long in €.
D. net long -€10 million.
E. net short -€10 million.
29. When the assets and liabilities of an FI are not equal in size, efficient hedging of interest rate risk can be
achieved by
A. issuing more equity and reducing the amount of borrowed funds.
B. issuing more equity and investing the funds in higher-yielding assets.
C. efficient hedging cannot be achieved without the use of derivative securities.
D. not exactly matching the maturities of assets and liabilities.
E. increasing the duration of assets and increasing the duration of equity.
30. Which of the following factors may affect the promised return an FI receives on a loan?
A. The collateral backing of the loan.
B. Fees relating to the loan.
C. The interest rate on the loan.
D. The credit risk premium on the loan.
E. All of the above.
31. Calculating the risk of a multi-asset trading portfolio requires the consideration of the correlations of
returns between the different assets.
True False
32. Futures contracts are standard in terms of all of the following EXCEPT
A. delivery month.
B. contract size.
C. specific asset to be delivered.
D. trading hours.
E. daily price limits.
33. When a bank enters into a fixed-floating currency swap, it is exposed to
A. only interest rate exposures.
B. zero interest rate exposure over the life of the swap.
C. zero interest rate and currency exposure over the life of the swap.
D. both interest rate and currency exposures.
E. only exchange rate exposure.
34. Derivative contracts allow an FI to manage interest rate and foreign exchange risk.
True False
35. Abnormally large and unexpected deposit withdrawals can occur because of concerns by depositors
about a bank's solvency relative to other banks.
True False
36. Junk bonds are bonds that are rated less than investment grade by bond-rating agencies.
True False
37. If a 16-year 12 percent semi-annual $100,000 T-bond, currently yielding 10 percent, is used to deliver
against a 20-year, 8 percent T-bond at 114-16/32, what is the conversion factor? What would the buyer have to pay the seller?
A. 1.156; $115,600.
B. 1.000; $114,160.
C. 1.150; $131,284.
D. 1.102; $124,200.
E. 1.158; $132,591.
38. If a US bank has variable-rate assets in US dollars and fixed-rate liabilities in Euros, the bank is exposed
to
A. interest rate declines and a depreciation of the dollar.
B. interest rate declines and an appreciation of the dollar.
C. interest rate increases and an appreciation of the dollar.
D. interest rate increases and a depreciation of the dollar.
E. zero exposure to interest rate and exchange rate exposures.
39. What is the basis on the T-bill futures contract?
A. 19 basis points.
B. 5 basis points.
C. 2 basis points.
D. Insufficient information.
E. 21 basis points.
40. An investor buys a $100,000 Treasury bond futures contract at 99-13/32nds. The following day the
Treasury bond futures settlement price is 99-26/32nds. What is the one-day profit or loss on the Treasury bond futures position?
A. A loss of $329.
B. A profit of $130.
C. A profit of $406.25.
D. A loss of $406.25.
E. A profit of $329.
41. The amount of security or collateral on a loan and the interest rate or risk premium on a loan normally
are negatively related.
True False
42. The increased opportunity for a bank to securitize loans into liquid and tradable assets is likely to affect
which type of risk?
A. Market risk.
B. Technological risk.
C. Sovereign risk.
D. Insolvency risk.
E. Interest rate risk.
43. The risk that an investor will be forced to place earnings from a loan or security into a lower yielding
investment is known as
A. liquidity risk.
B. credit risk.
C. reinvestment risk.
D. foreign exchange risk.
E. off-balance-sheet risk.
An FI has a 1-year 8-percent US$160 million loan financed with a 1-year 7-percent UK≤100 million CD.
The current exchange rate is $1.60/≤.
44. If the exchange rate remains the same, what is the dollar spread earned by the bank at the end of the
year?
A. $1,600,000.
B. $750,000.
C. $1,750,000.
D. $1,250,000.
E. $1,000,000.
45. If at the end of the year, the exchange rate is $1.65/≤, what is the spread earned on the loan by the FI in
dollars after adjusting fully for exchange rates?
A. -$3,750,000.
B. +$3,750,000.
C. +$5,000,000.
D. +$1,250,000.
E. -$1,250,000.
46. If the current (spot) rate for one-year British pound futures is currently at $1.58/≤ and each contract size
is ≤62,500, how many contracts are required to be purchased or sold in order to fully hedge against the pound exposure? (Assume no basis risk).
A. Buy 2,560 BP futures.
B. Buy 1,712 BP futures.
C. Sell 1,600 BP futures.
D. Sell 1,712 BP futures.
E. Buy 1,600 BP futures.
47. Which of the following is true of commercial paper?
A. It may help a corporation to raise funds often at rates below those banks charge.
B. It is always issued via an underwriter.
C. Total commercial paper outstanding in the US is very small compared with C&I loans.
D. It is a secured long-term debt instrument issued by corporations.
E. All corporations can tap the commercial paper market.
A bank with total assets of $271 million and equity of $31 million has a leverage adjusted duration gap
of +0.21 years. One-year maturity notes are currently priced at par and are paying 4.5 percent annually.
Two-year maturity notes are currently priced at par and are paying 5 percent annually. The terms of a swap of $100 million notional value of liabilities' payments are 4.95 percent annual fixed payments in exchange for floating rate payments tied to the annual discount yield.
48. What is the forward one-year discount yield expected next year?
A. 5.530 percent.
B. 4.950 percent.
C. 5.013 percent.
D. 5.000 percent.
E. 4.500 percent.
49. How is a hedge ratio commonly determined?
A. By running an ordinary least squares regression of changes in spot prices on changes in futures prices.
B. By discounting the optimal number of futures to sell per $1 of cash position using the yield involved.
C. By using the conversion factor.
D. By squaring the correlation between past changes in spot asset prices and futures prices.
E. By using the ratio of the most recent spot and futures price changes.
A U.S. FI wishes to hedge a Euro 10,000,000 loan using euro currency futures. Each euro futures
contract is for 125,000 euros, and the hedge ratio is 1.40. The loan is payable in one year in euros.
50. What type of currency hedge is necessary to protect the FI from exchange rate risk?
A. Buy € currency futures.
B. Sell € currency futures.
C. Finance the loan with € deposits.
D. Finance the loan with Eurodollar deposits.
E. Either B or D.
51. How many currency contracts are necessary to hedge this asset?
A. 42 contracts.
B. 112 contracts.
C. 57 contracts.
D. 80 contracts.
E. 75 contracts.
52. Which of the following is an example of microhedging asset-side portfolio risk?
A. When an FI manager wants to insulate the value of the institution's bond portfolio fully against a rise
in interest rates.
B. When an FI, attempting to lock in cost of funds to protect itself against a rise in short-term interest
rates, takes a short position in futures contracts on CDs.
C. When an FI hedges a cash asset on a direct dollar-for-dollar basis with a forward or futures contract.
D. FI manager trying to pick a futures contract whose underlying deliverable asset is not matched to the
asset position being hedged.
E. When an FI manager wishes to use futures or other derivative securities to hedge the entire balance
sheet duration gap.
53. The number of futures contracts that an FI should buy or sell in a macrohedge depends on the
A. size of its interest rate risk exposure.
B. direction of its interest rate risk exposure.
C. return risk trade-off from fully hedging that risk.
D. return risk trade-off from selectively hedging that risk.
E. All of the above.
54. An advantage of the historic or back simulation model for quantifying market risk includes
A. calculation of a standard deviation of returns is not required.
B. all return distributions must be symmetric and normal.
C. the systematic risk of the trading positions is known.
D. there is a high degree of confidence when using small sample sizes.
E. None of the above.
55. Market value at risk (VAR) is defined as the daily earnings at risk (DEAR) times the number of days
(N).
True False
56. A swap can be effectively hedged against interest rate risk by
A. selling out to another party.
B. entering into another swap agreement that is the mirror image of the original swap.
C. setting interest sensitive assets equal to interest sensitive liabilities.
D. setting asset duration equal to liability duration.
E. defaulting to the swap intermediary.
57. The risk that many borrowers in a particular country fail to repay their loans is
A. sovereign risk.
B. interest rate risk.
C. currency risk.
D. credit risk.
E. liquidity risk.
58. The U.S. dollar's decline against European currencies is
A. irrelevant for global banks.
B. potentially harmful for those banks that have financed European currency assets with U.S. dollar
liabilities.
C. potentially harmful for U.S. banks only.
D. potentially harmful for those banks that have financed U.S. dollar assets with liabilities denominated
in European currencies.
E. potentially harmful for European banks only.
59. In general, money center banks are exposed to less liquidity risk than smaller, regional banks.
True False
60. The risk that an FI may not have enough capital to offset a sudden decline in the value of its assets
relative to its liabilities is referred to as
A. sovereign risk.
B. insolvency risk.
C. liquidity risk.
D. currency risk.
E. interest rate risk.
61. Both parties in an interest rate swap normally are fully hedged against interest rate risk on the notional
amount of the swap.
True False
62. Catastrophe futures contracts
A. provide a payoff when the actual loss ratio is less than the expected loss ratio.
B. are designed to protect life insurance companies from the effects of natural disasters in which large
numbers of lives are lost.
C. are designed to protect property-casualty insurers against the extreme losses that can occur in
hurricanes.
D. provide a payoff to the seller of the contract that is equal to the loss ratio times the nominal value of
the contract.
E. are designed to hedge insurance companies from liability law suits.
63. Why does basis risk occur?
A. Spot and futures contracts are traded in different markets with different demand and supply functions.
B. Changes in the spot asset's price are not perfectly correlated with changes in the price of the asset
delivered under a forward or futures contract.
C. Answers B and C only.
D. The daily marking-to-market process enables an FI manager to close out a futures position by taking
an exactly offsetting position.
E. Answers A and C only.
64. Key elements of a financial risk management course include:
____ defining financial risk
____ identifying a range of risks
____ long breaks
____ understanding currency exposure and methods to hedge any resulting risk
____ understanding the difference between reserving for loan losses and credit risk transfer
____ doing a lot of calculations based on formulae with weird and goofy notation
____ an extraordinary instructor with amazing interpersonal and teaching skills
____ instructor provided espresso and Italian cookies
____ very difficult, online tests with horrible time limits
____ cool videos about risk and other stuff to shorten the instructor's talking time
City bank has six-year zero coupon bonds with a total face value of $20 million. The current market yield on the bonds is 10 percent.
65. What is the price volatility if the maximum potential adverse move in yields is estimated at 20 basis
points?
A. -1.20 percent.
B. -2.00 percent.
C. -2.18 percent.
D. -1.32 percent.
E. -1.09 percent.
66. What is the modified duration of these bonds?
A. 5.45 years.
B. 10.9 years.
C. 6.60 years.
D. 6.00 years.
E. 10.0 years.
67. If a stock portfolio replicates the returns on a stock market index, the beta of the portfolio will be
A. greater than 1.
B. negative.
C. equal to 0.
D. equal to 1.
E. less than 1.
68. From the perspective of an FI, which of the following is an advantage of a floating-rate loan?
A. The interest rate risk is transferred to the borrower.
B. Stable interest payments will be received throughout the loan period.
C. The pre-specified interest rate remains in force over the loan contract period no matter what happens
to market rate.
D. The bank can request repayment of a loan at any time in the contract period.
E. The default risk is completely eliminated.
69. The BIS definition: "the risk of loss resulting from inadequate or failed internal processes, people, and
systems or from external events," encompasses which of the following risks?
A. Credit risk and liquidity risk
B. Sovereign risk and credit risk
C. Credit risk and market risk
D. Operational risk and technology risk
E. Technology risk and liquidity risk
70. Monte-Carlo simulation is a process of creating asset returns based on actual trading days so that the
probabilities of occurrence are consistent with recent historical experience.
True False
71. A swap that technically is a succession of forward contracts on interest rates is
A. an equity swap.
B. a currency swap.
C. a credit swap.
D. a commodity swap.
E. an interest rate swap.
72. Politically motivated limitations on payments of foreign currency may expose an FI to
A. foreign exchange risk.
B. credit risk.
C. off-balance-sheet risk.
D. interest rate risk.
E. sovereign country risk.
73. Which of the following observations concerning floating-rate loans is NOT true?
A. In rising interest rate environments, borrowers may find themselves unable to pay the interest on their
floating-rate loans.
B. They better enable FIs to hedge the cost of rising interest rates on liabilities.
C. The loan rate can be periodically adjusted according to a formula.
D. They pass the risk of interest rate changes onto borrowers.
E. They are less credit risky than fixed-rate loans.
74. The risk that interest income will increase at a slower rate than interest expense is
A. political risk.
B. currency risk.
C. credit risk.
D. interest rate risk.
E. liquidity risk.
75. The covariance of the change in spot exchange rates and the change in futures exchange rates is 0.6060,
and the variance of the change in futures exchange rates is 0.5050. What is the estimated hedge ratio for this currency?
A. 0.833.
B. 0.694.
C. 1.440.
D. 0.306.
E. 1.200.
76. Core deposits represent a relatively short-term source of funds.
True False
Conyers Bank holds U.S. Treasury bonds with a book value of $30 million. However, the U.S. Treasury bonds currently are worth $28,387,500.
77. If Treasury bond futures prices are currently 89-00/32nds, what is the value of the Treasury bond futures
hedge position?
A. $28,387,500.
B. $890,000.
C. $89,000,000.
D. $26,700,000.
E. $30,000,000.
78. The bank's portfolio manager wants to shorten asset maturities. Which of the following statements is
true?
A. The portfolio manager is reluctant to sell the bonds outright since the bank will have to take a loss.
B. The portfolio manager is willing to sell the bonds outright since they are not as valuable as their book
value.
C. The portfolio manager is willing to sell the bonds outright since they are more valuable than their
book value.
D. The portfolio manager is reluctant to sell the bonds outright since the bank will have to pay taxes on
the gain.
E. None of the above.
79. If T-bond futures prices decrease to 81-27/32nds, what is the value of the futures hedge position?
A. $24,553,125.
B. $812,700.
C. $81,270,000.
D. $28,387,500.
E. $26,700,000.
80. This risk of default is associated with general economy-wide or macro conditions affecting all
borrowers.
A. Sovereign risk.
B. Systematic credit risk.
C. Firm-specific credit risk.
D. Liquidity risk.
E. Refinancing risk.
A bank has liabilities of $4 million with an average maturity of two years paying interest rates of 4
percent annually. It has assets of $5 million with an average maturity of 5 years earning interest rates of
6 percent annually.
81. What is the maximum interest rate that it can refinance its $4 million liability and still break even on its
net interest income in dollars?
A. 8.5 percent.
B. 7.0 percent.
C. 8.0 percent.
D. 7.5 percent.
E. 6.5 percent.
82. To what risk is the bank exposed?
A. Reinvestment risk.
B. Refinancing risk.
C. Interest rate risk.
D. Answers A and C only.
E. Answers B and C only.
83. What is the bank's net interest income in dollars in year 3, after it refinances all of its liabilities at a rate
of 8 percent?
A. -$10,000.
B. -$15,000.
C. +$20,000.
D. +$10,000.
E. -$20,000.
84. What is the bank's net interest income in dollars in year 3, after it refinances all of its liabilities at a rate
of 6 percent?
A. +$140,000.
B. +$60,000.
C. +$800,000.
D. -$140,000.
E. -$60,000.
85. Risk management for financial intermediaries deals with
A. complying scrupulously with all government regulations.
B. controlling the scope of the institution's activities.
C. limiting the geographic spread of the institution's offices.
D. limiting the mismatches on the institution's balance sheet.
E. controlling the overall size of the institution.
86. All other things equal, longer term loans are more likely to be
A. high interest rate loans.
B. variable-rate loans.
C. lowest risk category loans.
D. fixed-rate loans.
E. commitment loans.
87. In a conventional interest rate swap agreement, the fixed-rate payer is attempting to transform the
variable-rate nature of its liabilities into fixed-rate liabilities.
True False
88. Conceptually, an FI's trading portfolio can be differentiated from its investment portfolio by
A. time horizon.
B. Answers A and B only.
C. size of assets.
D. interest rate fluctuations.
E. liquidity.
89. Which of the following is true of the prime lending rate?
A. It is the rate for interbank dollar loans of a given maturity in the Eurodollar market.
B. The best and largest borrowers commonly pay above this lending rate.
C. It is also known as LIBOR.
D. It is the lending rate charged to the FI's lowest-risk customers.
E. It is most commonly used in pricing longer-term loans.
90. If a 12-year, 6.5 percent semi-annual $100,000 T-bond, currently yielding 4.10 percent, is used to deliver
against a 6-year, 5 percent T-bond at 110-17/32, what is the conversion factor? What would the buyer have to pay the seller?
A. 1.1027; $110,531.
B. 1.2257; $135,478.
C. 1.7263; $141,788.
D. 1.3622; $163,339.
E. 1.8370; $253,830.
91. Which of the following refers to an FI's ability to generate cost synergies by producing more than one
output with the same inputs?
A. Economies of scope.
B. Business continuity plan.
C. Break-even point.
D. Market intermediation.
E. Economies of scale.
92. Commercial real estate mortgages have been the fastest growing component of real estate loans.
True False
93. Which of the following is a method that may overcome weaknesses in the historic or back simulation
model?
A. Increase the number of assets in the trading portfolio in order to benefit from higher levels of
diversification.
B. Weight sample size observations so that the more recent observations contribute a larger amount to
the model.
C. The weaknesses in the model cannot be overcome.
D. The use of smaller sample sizes to estimate return distributions.
E. Decrease the number of assets in the trading portfolio so that past returns will provide more accuracy
to the model.
94. Currency swaps can be designed to reduce foreign exchange risk.
True False
95. What does a high ratio of loans to deposits indicate?
A. Liquidity concerns are at a bare minimum for the FI.
B. DI relies heavily on the short-term money market to fund loans.
C. DI has large amounts of asset-side liquidity.
D. DI relies heavily on core deposits to fund loans.
E. High degree of loan commitments.
96. A mortgage loan officer is found to have provided false documentation that resulted in a lower interest
rate on a loan approved for one of her friends. The loan was subsequently added to a loan pool,
securitized and sold. Which of the following risks applies to the false documentation by the employee?
A. Sovereign risk.
B. Operational risk.
C. Technological risk.
D. Credit risk.
E. Market risk.
97. LIBOR, the London Interbank Offered Rate, is the rate for short-term interbank dollar loans in the
domestic money-center bank market.
True False
98. Which of the following statements does not reflect a borrower-specific factor often used in qualitative
default risk models?
A. Reputation is an implicit contract regarding borrowing and repayment that extends beyond the formal
explicit legal contract.
B. Reputation is a key reason why initial public offering of debt securities by small firms have a higher
interest rate than do debt issues of more seasoned borrowers.
C. Firms with high earnings variance are less attractive credit risks than those firms that have a history
of stable earnings.
D. A borrower's leverage ratio is positively related to the probability of default over all levels of debt.
E. Loans can be collateralized or uncollateralized.
99. One reason for basis risk in an interest rate swap is that changes in the index on the variable rate portion
of the swap may not be perfectly correlated with changes in the index on the cash balance sheet portion of the liabilities.
True False
100. A plain vanilla fixed-floating interest rate swap may involve a third party that acts as a broker, but is not likely to have any sophisticated special features.
True False