G345 Final Exam Questions and Answers Already Passed
Exchange-Listed Derivatives - Answers Futures and Options
Over the Counter Market - Answers Forwards, swaps and options
Reasons to use derivatives - Answers hedge risks, speculative, arbitrage profit, change the nature of a
liability/investment
Forward Contract - Answers Define price today but payment/delivery is in the future. No daily
settlement. OTC. No money exchanges hands when negotiated
Pro: Flexible
Con: lack of liquidity, default risk
Future Contract - Answers Same as forward but are standardized in amount, asset characteristics and
delivery time;
Greater liquidity than forwards since they are traded on a secondary market
Options - Answers Right to buy or sell an asset at a predetermined price by a predetermined time.
Insurance like features.
American vs European Option - Answers American: Exercise whenever you want
European: Only exercise at expiration
Why use options rather than futures? - Answers Futures have accounting problems. Future losses are
offset by unrealized future profits in the rest of the portfolio and it is not allowed to offset these losses
in its accounting statements
Intrinsic Value of Options - Answers Call: Stock price - strike
Put: Strike - stock price.
"In the money" when positive
Time Value of an Option - Answers = Premium - intrinsic value
Premium you pay is entirely time value. "It's like ice cream"
Swaps - Answers agreements to exchange two securities or currencies at specified future times.
differences typically criteria used to calculate cash flows (interest rates, inflation)
Most Common Swap - Answers Interest rate swap. Fixed vs floating rate
Advantages and Disadvantages of Interest Rate Swap - Answers Advantage: low transaction costs, info
advantage, potentially very long time horizons
, Disadvantage: Lack of liquidity, difficult to arrange, default risk
Credit Derivatives - Answers Bundle credit risk to lower total risk. OTC market. CDS is about 30% of the
market
Origins of the Fed - Answers Quite a few banking panics from 1836 - 1914. Run on banks were common
and it was tough to grow significantly with that going on
Federal Reserve Act of 1913 - Answers Created the central bank. 1907 finally convinced the general
public that a lender of last resort was needed to prevent another crisis
Entities of the Federal Reserve - Answers Federal Reserve banks, Board of Governors, FOMC, Federal
Advisory Council, 2,500 member commercial banks. See slide 09.a1 slide 5 for org chart
What all does the federal reserve system manage as the bank of the US government? - Answers
Currency, US treasury bank account, US treasury borrowings
What all does the federal reserve system manage as the bank of banks? - Answers Hold deposits, ensure
a payment network, provide discount loans, supervise and regulate, collect data on biz conditions
Leaders of District Banks - Answers 6 directors elected by members banks and 3 directors appointed by
the board of governors. 3 bankers, 3 industry people, 3 other people. All constituents. These directors
appoint the president of the bank
What is a member bank - Answers any bank that is part of the federal reserve system. All national banks
must be a part of it. Commercial banks chartered by states are not required to. All have same reserve
requirements though.
Board of Governors - Answers 7 members headquarted in DC. 14 year contracts. Chairman is chosen
from the governors and serves 4 year term.
Duties of the Board of Governors - Answers Open market operations, reserve requirements, control
discount rate, margin requirements, supervise bank activity
FOMC - Answers 8 meetings per year. Board of governors plus president of federal reserve bank of New
York, and presidents of four other federal reserve banks. The one that you read about
Principles of Central Bank Design - Answers - Independence (remove political motives)
- Decision-making by committee
- Policy framework
- Transparency
- Accountability
Exchange-Listed Derivatives - Answers Futures and Options
Over the Counter Market - Answers Forwards, swaps and options
Reasons to use derivatives - Answers hedge risks, speculative, arbitrage profit, change the nature of a
liability/investment
Forward Contract - Answers Define price today but payment/delivery is in the future. No daily
settlement. OTC. No money exchanges hands when negotiated
Pro: Flexible
Con: lack of liquidity, default risk
Future Contract - Answers Same as forward but are standardized in amount, asset characteristics and
delivery time;
Greater liquidity than forwards since they are traded on a secondary market
Options - Answers Right to buy or sell an asset at a predetermined price by a predetermined time.
Insurance like features.
American vs European Option - Answers American: Exercise whenever you want
European: Only exercise at expiration
Why use options rather than futures? - Answers Futures have accounting problems. Future losses are
offset by unrealized future profits in the rest of the portfolio and it is not allowed to offset these losses
in its accounting statements
Intrinsic Value of Options - Answers Call: Stock price - strike
Put: Strike - stock price.
"In the money" when positive
Time Value of an Option - Answers = Premium - intrinsic value
Premium you pay is entirely time value. "It's like ice cream"
Swaps - Answers agreements to exchange two securities or currencies at specified future times.
differences typically criteria used to calculate cash flows (interest rates, inflation)
Most Common Swap - Answers Interest rate swap. Fixed vs floating rate
Advantages and Disadvantages of Interest Rate Swap - Answers Advantage: low transaction costs, info
advantage, potentially very long time horizons
, Disadvantage: Lack of liquidity, difficult to arrange, default risk
Credit Derivatives - Answers Bundle credit risk to lower total risk. OTC market. CDS is about 30% of the
market
Origins of the Fed - Answers Quite a few banking panics from 1836 - 1914. Run on banks were common
and it was tough to grow significantly with that going on
Federal Reserve Act of 1913 - Answers Created the central bank. 1907 finally convinced the general
public that a lender of last resort was needed to prevent another crisis
Entities of the Federal Reserve - Answers Federal Reserve banks, Board of Governors, FOMC, Federal
Advisory Council, 2,500 member commercial banks. See slide 09.a1 slide 5 for org chart
What all does the federal reserve system manage as the bank of the US government? - Answers
Currency, US treasury bank account, US treasury borrowings
What all does the federal reserve system manage as the bank of banks? - Answers Hold deposits, ensure
a payment network, provide discount loans, supervise and regulate, collect data on biz conditions
Leaders of District Banks - Answers 6 directors elected by members banks and 3 directors appointed by
the board of governors. 3 bankers, 3 industry people, 3 other people. All constituents. These directors
appoint the president of the bank
What is a member bank - Answers any bank that is part of the federal reserve system. All national banks
must be a part of it. Commercial banks chartered by states are not required to. All have same reserve
requirements though.
Board of Governors - Answers 7 members headquarted in DC. 14 year contracts. Chairman is chosen
from the governors and serves 4 year term.
Duties of the Board of Governors - Answers Open market operations, reserve requirements, control
discount rate, margin requirements, supervise bank activity
FOMC - Answers 8 meetings per year. Board of governors plus president of federal reserve bank of New
York, and presidents of four other federal reserve banks. The one that you read about
Principles of Central Bank Design - Answers - Independence (remove political motives)
- Decision-making by committee
- Policy framework
- Transparency
- Accountability
