When operating in a heavily traded currency, a commercial and retail bank's treasury is likely to focus on
cover operations. Which one of the following four commercial and retails treasury's operations is known as a
cover operation?

• A.Managing the net interest rate risk in the banking book directly with market counterparties by operating
  a derivatives trading desk.
• B.Mitigating liquidity risk, or effectively managing the balance sheet and its funding.
• C.Effectively transferring the interest rate risk in the banking book to the investment bank at a fair transfer
  price.
• D.Ensuring that the risks generated by the bank's business are mitigated in the market.

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Which one of the following four statements does identify correctly the relationship between the value of an
option and perceived exchange rate volatility?

• A.As the perceived future foreign exchange volatility decreases, the value of all options increases.
• B.With increases in perceived future foreign exchange volatility, the value of all foreign exchange
• C.As the perceived future foreign exchange volatility increases, the value of all options increases.
• D.Option values can only change due to the factors related to the demand for specific options

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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 sell 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 buy the underlying instrument on
  any date up to and including the expiry date.

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Which of the following statements about the interest rates and option prices is correct?

• A.If rho is positive, rising interest rates decrease option prices.
• B.If rho is positive, rising interest rates increase option prices.
• C.As interest rates fall, all options will rise in value.
• D.As interest rates rise, all options will rise in value.

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James Arthur is a customer of a bank who has taken a floating rate loan from the bank. He is concerned that
the rates may rise in the future increasing his payment amount. Which of the following instruments should he
buy to hedge against the rise in interest rates?

• A.Interest rate swap that receives fixed and pays floating
• B.Interest rate cap
• C.Interest rate floor
• D.Index amortizing swap

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