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# Hull: Options, Futures, and Other Derivatives, Ninth Edition

## Chapter 9: OIS Discounting, Credit Issues, and Funding Costs

Multiple Choice Test Bank: Questions
1. Prior to the credit crisis that started in 2007, which of the following was used
by derivatives traders for the discount rate when derivatives were valued
A. The Treasury rate
B. The LIBOR rate
C. The repo rate
D. The overnight indexed swap rate
2. Since the credit crisis that started in 2007 which of the following have
derivatives traders used as the risk-free discount rate for collateralized
transactions
A. The Treasury rate
B. The LIBOR rate
C. The repo rate
D. The overnight indexed swap rate
3. Which
A.
B.
C.

## of the following is true

OIS rates are less than the corresponding LIBOR/swap rates
OIS rates are greater than corresponding LIBOR/swap rates
OIS rates are sometimes greater and sometimes less than LIBOR/swap
rates
D. OIS rates are equivalent to one-day LIBOR rates

## 4. Which of the following describes a 3-month overnight indexed swap (OIS)?

A. A fixed rate is exchanged for the overnight rate every day for three
months
B. LIBOR is exchanged for the overnight rate every day for three months
C. The arithmetic average of overnight rates is exchanged for a fixed rate
at the end of three months
D. The geometric average of overnight rates is exchanged for a fixed rate
at the end of three months
5. Suppose that OIS rates for all maturities are 2.5% and swap rates for all
maturities are 3%. Which of the following is true?
A. Forward LIBOR rates are greater when OIS discounting is used than
when LIBOR discounting is used
B. Forward LIBOR rates are less when OIS discounting is used than when
LIBOR discounting is used
C. Forward LIBOR rates are the same for both OIS discounting and LIBOR
D. Either A or B can be true
6. CVA stands for
C. Credit value agreement
D. Collateral value agreement

## 7. In a fully collateralized transaction which of the following leads to a pricing

A. The rate paid on cash collateral is the fed funds rate
B. The rate paid on cash collateral is greater than the fed funds rate
C. The rate paid on cash collateral is less than the fed funds rate
D. Both B and C
8. When
A.
B.
C.
D.

## a banks borrowing rate goes up, which of the following is true

DVA increases so that the banks profit goes down
DVA increases so that the banks profit goes up
DVA declines so that the banks profit goes down
DVA declines so that the banks profit goes up

## 9. In October 2008 the three-month LIBOR-OIS spread rose to

A. 231 basis points
B. 364 basis points
C. 450 basis points
D. 520 basis points
10.As a bank`s borrowing rate increases, which of the following is true if a bank
calculates FVA
A. FVA increases
B. FVA declines
C. FVA stays the same
D. FVA may increase or decline.
11.Which of the following is true
A. CVA and DVA can be calculated deal by deal
B. CVA and DVA must both be calculated for the whole portfolio a bank
has with a counterparty
C. CVA can be calculated deal by deal but DVA must be calculated for a
portfolio
D. DVA can be calculated deal by deal but CVA must be calculated for a
portfolio
12.Which of the following is true when a bank uses OIS discounting for valuing a
LIBOR-for-fixed swap
A. The LIBOR/swap zero curve is calculated before the OIS zero curve
B. The OIS zero curve is calculated before the LIBOR/swap zero curve
C. The swap is valued using OIS forward rates and OIS discounting
D. The forward rates are calculated from the banks borrowing costs
13.It is assumed that a company can default after one year or after two years.
The probability of default at each time is 1.5%. The present value of the
expected loss to a bank on a derivatives portfolio if the company defaults
after one year is estimated to be \$1 million. The present value of the
expected loss if it defaults after two years is estimated to be \$2 million.
Which of the following is the banks CVA ?
A. \$3,000,000

B. \$300,000
C. \$450,000
D. \$150,000
14.Accountants like to value a derivatives portfolio at
A. The bid price
B. The offer price
C. The exit price
D. Original cost less depreciation
15.In the
A.
B.
C.
D.

## U.S., which of the following is true about Treasury instruments

Their income is not subject to tax at the state level
Their income is not subject to tax at the federal level
Both A and B are true
They are not subject to capital gains tax at the federal level

16.Suppose that OIS rates of all maturities are 6% per annum, continuously
compounded. The one-year LIBOR rate is 6.4%, annually compounded and
the two-year swap rate for a swap where payments are exchanged annually
is 6.8%, annually compounded. Which of the following is closest to the LIBOR
forward rate for the second year when LIBOR discounting is used and the rate
is expressed with annual compounding
A. 7.199%
B. 7.221%
C. 7.223%
D. 7.225%
17.Suppose that OIS rates of all maturities are 6% per annum, continuously
compounded. The one-year LIBOR rate is 6.4%, annually compounded and
the two-year swap rate for a swap where payments are exchanged annually
is 6.8%, annually compounded. Which of the following is closest to the LIBOR
forward rate for the second year when OIS discounting is used and the rate is
expressed with annual compounding?
A. 7.199%
B. 7.221%
C. 7.223%
D. 7.225%
18.Which of the following involves most credit risk
B. OTC trading with a central clearing party being used
C. OTC trading with bilateral clearing and collateral being posted
D. OTC trading with bilateral clearing and no collateral being posted
19.A bank has three uncollateralized transactions with a counterparty worth +
\$10 million, \$20 million and +\$25 million. A netting agreement is in place.
What is the maximum loss if the counterparty defaults today.
A. \$15 million
B. \$35 million
C. \$20 million

D. Zero
20.Since the 2008 credit crisis
A. LIBOR has replaced OIS
swaps
B. OIS has replaced LIBOR
swaps
C. LIBOR has replaced OIS
D. OIS has replaced LIBOR

## as the discount rate for non-collateralized

as the discount rate for non-collateralized
as the discount rate for collateralized swaps
as the discount rate for collateralized swaps