A credit analyst wants to determine a good pricing strategy to compensate for credit decisions that might have
been made incorrectly. When analyzing her credit portfolio, the analyst focuses on the spreads in each loan to
determine if they are sufficient to compensate the bank for all of the following costs and risks EXCEPT.

• A.The opportunity cost of risk-adjusted marginal cost of capital.
• B.The inherent risk of lending to this borrower while providing a return on the risk capital used to the
  support the loan.
• C.The overhead cost of maintaining the loan and the account.
• D.The marginal cost of funds provided.

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If the yield on the 3-month risk free bonds issued by the U.S government is 0.5%, and the 3-month LIBOR
rate is 2.5%, what is the TED spread?

• A.2.0%
• B.3.0%
• C.-2.0%
• D.0.5%

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Bank G has a 1-year VaR of USD 20 million at 99% confidence level while bank H has a 1-year VaR of USD
10 million at the same confidence level. Which bank is in a more risky position as measured by VaR?

• A.Bank G is taking twice the risk of bank H as measured by VaR.
• B.Since the confidence levels are the same we cannot make any conclusions.
• C.Bank H is taking twice the risk of bank G as measured by VaR.
• D.Both banks are equally risky since the measurements are with the same confidence level.

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Interest rate swaps are:

• A.OTC derivative contracts that allow banks to take positions in series of future exchange rates.
• B.Exchange traded derivative contracts that allow banks to take positions in future interest rates.
• C.Exchange traded derivative contracts that allow banks and customers to obtain the risk/reward profile of
  long-term interest rates without having to use long-term funding.
• D.OTC derivative contracts that allow banks and customers to obtain the risk/reward profile of long-term
  interest rates without relying on long-term funding.

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Which one of the following four statements correctly describes an American call option?

• A.An American call option gives the buyer of that call option the right to sell the underlying instrument on
  the expiry date.
• B.An American call option gives the buyer of that call option the right to buy the underlying instrument on
  the expiry date.
• C.An American call option gives the buyer of that call option the right to buy the underlying instrument on
  any date up to and including the expiry date.
• D.An American call option gives the buyer of that call option the right to sell the underlying instrument on
  any date up to and including the expiry date.

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