Which one of the following four statements regarding commodity exchanges is INCORRECT?

• A.Commodity markets are mot liquid than debt markets.
• B.Customers rarely trade physical commodities with banks.
• C.Banks trade in OTC contracts primarily to serve clients and facilitate client hedging and lending.
• D.Banks have no natural direct exposure to commodities.

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Which one of the following four statements correctly defines a typical carry trade?

• A.A bank borrows funds in a high-interest currency and places the funds in a long-term low volatility
  investment vehicle.
• B.A bank borrows funds in a low-interest currency, accumulates reserves, and lends in another
  low-interest currency.
• C.A bank borrows funds in a high-interest currency and invests the funds into high-yield emerging market
  debt.
• D.A bank borrows funds in a low-interest currency and places the funds on deposit in a high-interest
  currency.

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An asset manager for a large mutual fund is considering forward exchange positions traded in a clearinghouse
system and needs to mitigate the risks created as a result of this operation. Which of the following risks will be
created as a result of the forward exchange transaction?

• A.Exchange rate and credit risk
• B.Credit risk
• C.Exchange rate and interest rate risk
• D.Exchange rate risk

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Which of the following would a bank resort to as a "lender of last resort" in the event of an extreme liquidity
crisis?

• A.Discount window
• B.LIBOR markets
• C.Futures Markets
• D.U.S treasury markets

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Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year
no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate
spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both
interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta
defaults, the bank expects to lose 50% of its promised payment.
What may happen to the Delta's initial credit parameter and the value of its loan if the machinery industry
experiences adverse structural changes?

• A.Probability of default and loss at default may increase simultaneously, while duration rises causing the
  loan value to decrease.
• B.Probability of default and loss at default may increase simultaneously, while duration falls causing the
  loan value to decrease.
• C.Probability of default and loss at default may decrease simultaneously, while duration falls causing the
  loan value to decrease.
• D.Probability of default and loss at default may decrease simultaneously, while duration rises causing the
  loan value to decrease.

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