Series 50: Exercise

Exercise

1. 1. The city of Farmington enters into a swap agreement with Best State Bank. Farmington agrees to pay a 7% fixed interest rate to Best State Bank, while in return Best State Bank agrees to pay LIBOR + 2% to Farmington. Which of the following are true?
2. I. Farmington has entered a floating-to-fixed rate swap.
3. II. Farmington has entered a fixed-to-floating rate swap.
4. III. Best State Bank has entered a floating-to-fixed rate swap.
5. IV. Best State Bank has entered a fixed-to-floating rate swap.
6. A. I and III
7. B. I and IV
8. C. II and IV
9. D. II and III
10. 2. Wanda buys a $5 call option with a strike price of $75. The price of the underlying stock goes up to $90. What is the intrinsic value of the call option?
11. A. $10
12. B. $15
13. C. $5
14. D. $90
15. 3. In which kind of swaption can the holder enter the swap only on the expiration date?
16. A. American swaption
17. B. Bermudan swaption
18. C. Eastern swaption
19. D. European swaption
20. 4. Charley buys a $5 put option with a strike price of $50. The underlying asset is currently valued at $45. What is the time value of the option?
21. A. $5
22. B. -$5
23. C. $0
24. D. $10

Answer true or false

1. 5. True or false: The SEC is currently prohibited from regulating the over-the-counter swaps market.
2. 6. True or false: The CFTC has authority over security-based swaps, while the SEC has authority over all other swaps.

Answers

1. 1. B. When Farmington agrees to pay a fixed rate in exchange for a floating rate, it is engaging in a floating-to-fixed rate swap. On the other end of the deal, Best State bank is trading its fixed rate for a floating rate payment, which is known as a fixed-to-floating swap.
2. 2. B. Recall