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1. A bank with long term fixed rate mortgages funded with short term deposits can reduce its exposure to rising interest rates by selling bond futures contracts.True False2. Which of the following methods measure loan concentration risk by tracking credit ratings of firms in particular sectors or ratings class for unusual downgrades?A. Migration analysis.B. Concentration limits.C. Loan loss ratio-based model.D. Moody’s Analytics portfolio manager model.E. Loan volume-based model.3. State regulation of the U.S. insurance industry has an effect on the ability of insurance companies to invest in foreign securities. True False4. A U.S. owned and regulated FI wishes to hedge a â¬10,000,000 loan that is payable in one year in euros. 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.5. 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 balance sheet portion of the liabilities. True False6. Once a fixed-floating interest rate swap agreement has been negotiated under no-arbitrage conditions, both parties to the swap agreement know with certainty the exact amount of their respective cash flows.True False7. When compared to swap and option contracts, credit risk exposure is greatest with a futures contract.True False8. A total return credit swap eliminates interest rate risk as well as credit risk.True False9. The credit risk on an interest rate swap is generally much less than on an individual loan.True False10. What is the basic reason that two counterparties enter into a swap agreement?A. Exchange of one specified cash flow in the future based on some underlying index.B. Better management of credit risk by using a fixed or floating rate bond as hedging instrument.?C. To restructure or off-set the expected future cash flows to be collected from assets or liabilities held on the balance sheet.D. Exchange of assets for a specific period of time at a specified interval.E. Taking the opposite side of each transaction in order to keep the swap market liquid.11. Why were inverse floaters developed?A. To exchange specified periodic cash flows in the future based on some underlying instrument.B. To better manage their interest rate, foreign exchange, and credit risks of corporate enterprises.C. To lower the cost of financing for government agencies.D. To determine payments and timing of payments when there is no standardized contract.E. To keep the swap market liquid by locating or matching counterparties.12. A US bank has fixed-rate assets in US dollars and variable-rate liabilities in Euros. This bank is exposed toA. interest rate increases and an appreciation of the dollar.B. interest rate declines and an appreciation of the dollar.C. interest rate increases and a depreciation of the dollar.D. interest rate declines and a depreciation of the dollar.E. zero exposure to interest rate and exchange rate exposures.
