Question 1

Which one of the following four statements about hedging is INCORRECT?

Options :

A : Traders can hedge their risks by taking an appropriate position in the underlyinginstrument.

B : Traders can hedge their portfolio risks by taking a position in a different instrument.

C : For a fully hedged portfolio, any changes in markets prices will typically producesignificant changes in the market value of the portfolio.

D : A large number of hedge positions is generally required to match the underlyingtransaction completely.

Answer: C

Question 2

Which one of the following statements regarding collateralized mortgage obligations (CMO)

is incorrect?

Options :

A :

CMOs have senior tranches which are considered short-term, low-risk instruments by

banks

B :

CMOs are asset-backed securities that have pools of collateralized debt obligations

(CDOs) as underlying collateral.

C : CMOs are generally less risky investment than CDOs.

D : CMOs are pools of mortgages that are divided according to the timing of cash flows.

Answer: B

Question 3

Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta defaults, the bank expects to lose 50% of its promised payment. What interest rate should Alpha Bank charge on the no-payment loan to Delta Industrial Machinery Corporation?

Options :

A : 8%

B : 9%

C : 10%

D : 12%

Answer: C

Question 4

According to Basel II what constitutes Tier 3 capital?

Options :

A : Subordinated debt issues that pay interest.

B : Debt capital that can only be used to support market risk in the trading book of the bank.

C : Preference shares that confer on issuers the right to defer payment of a fixed dividend.

D : Hybrid debt capital instruments that are similar to equity.

Answer: B

Question 5

For which one of the following four reasons do corporate customers use foreign exchangederivatives?I. To lock in the current value of foreign-denominated receivablesII. To lock in the current value of foreign-denominated payablesIII. To lock in the value of expected future foreign-denominated receivablesIV. To lock in the value of expected future foreign-denominated payables

Options :

A : II

B : I and IV

C : II and III

D : I, II, III, IV

Answer: D