Chapter 3 Answers

docx

School

SUNY Canton *

*We aren’t endorsed by this school

Course

325

Subject

Finance

Date

Feb 20, 2024

Type

docx

Pages

Uploaded by BailiffSeahorseMaster924

Interest rate caps protect the lender from falling interest rates. FALSE A currency swap is where two parties agree to exchange interest payments in order to hedge against interest rate risk. FALSE Most derivatives (measured by notional value) are traded on organized exchanges. FALSE If a financial institution makes an offsetting sale and purchase of the same futures contract, it has no obligation either to deliver or take delivery of the contract. TRUE A bank will use a short hedge in the futures market to avoid higher borrowing costs or to protect against declining asset values. TRUE A reverse swap is where the parties exchange the principal payments instead of the interest payments on loans. FALSE Today, bank holding companies control about what percentage of the industry's assets? 90% Which of the following would be part of the electronic branches of a bank? ONLINE BILL PAYING A financial institution with a negative gap would like to receive the floating rate in an interest-rate swap. FALSE Unlike futures contracts, interest rate swap agreements have no basis risk. FALSE Many banks are not only users of derivative products but also dealers. TRUE When the banking industry moves toward larger but fewer organizations, it is known as: CONSOLIDATION A hedging tool that provides "one-sided" insurance against interest rate risk is the interest rate option, which, like financial futures contracts, obligates the parties to the contract to either deliver or take delivery of securities. FALSE A futures hedge against interest-rate changes generally requires a bank to take an opposite position in the futures market from its current position in the cash market. TRUE The number of futures contracts needed to hedge a position increases as the bank's duration gap increases. TRUE Corporations chartered for the simple purpose of holding the stock of at least one bank are called: BANK HOLDING COMPANIES The sensitivity of the market price of a financial futures contract depends partly upon the duration of the security to be delivered under the futures contract. TRUE A financial institution confronted with a negative interest-sensitive gap could avoid unacceptable losses from rising interest rates by covering the gap with a short hedge. TRUE Money center banks appear to use option contracts to protect the value of a bond portfolio or to hedge against interest-sensitive or duration gaps. TRUE

Banks that offer their services exclusively through the web are called: VIRTUAL BANKS Basis risk exists on interest rate swaps because the interest rate on the swap agreement may differ from the interest rate on assets and liabilities that the parties hold. TRUE U.S. Treasury bond futures contracts call for the future delivery of U.S. T-bonds with minimum denominations of $100,000 and minimum maturities of 15 years. TRUE Why was the Riegle Neal Act passed in 1994 after many years of resistance? ALL OF THE ABOVE The short hedge would usually be the correct choice if a bank is concerned about avoiding lower than expected yields from loans and security investments. FALSE Some services of this type of bank are highly centralized while others are decentralized at the individual service facility. What type of bank does this most likely describe? BRANCH BANK What company submitted an application to the state of Utah to establish an industrial bank in July of 2005? WAL-MART Banks are generally writers (sellers) of put and call option contracts. FALSE The short hedge in financial futures contracts is most likely to be used in situations where a bank would suffer losses due to falling interest rates. FALSE In most interest rate swaps, netting reduces the default risk because the parties actually exchange only the difference in the interest payments. TRUE

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version