Hull_OFOD9e_MultipleChoice_Questions_and_Answers_Ch08

Hull_OFOD9e_MultipleChoice_Questions_and_Answers_Ch08 -...

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Hull: Options, Futures, and Other Derivatives, Ninth Edition Chapter 8: Securitization and the Credit Crisis of 2007 Multiple Choice Test Bank: Questions with Answers 1. Which of the following tends to lead to an increase in house prices? A. An increase in interest rates B. Regulators specifying a maximum level for the loan-to-value ratio on mortgages C. Banks reducing the minimum FICO score that borrowers are required to have D. An increase in foreclosures Answer: C An increase in interest rates tends to lower house prices because buyers have higher financing costs. Limiting the loan-to-value ratio means that some potential buyers cannot get the mortgages they require and there is less demand for houses with the result that prices tend to decline. An increase in foreclosures increases supply and this also lowers prices. However, if banks relax their lending standards (e.g. by reducing the minimum FICO scores they require) demand should increase because more people can get mortgages. As a result prices will increase. 2. Which of the following is true of a non-recourse mortgage? In a non-recourse mortgage a lender cannot seize other assets of the borrower besides the house in order to be repaid. This means that if the price of the house declines below the balance outstanding on the mortgage the borrower can in principle give the house to the lender in return for tearing up the mortgage. The borrower therefore has an American style put option to sell the house for the amount outstanding on the mortgage. 3. Which of the following is NOT true A, B, and C are true. D is not because correlations tend to increase, not decrease, in stressed markets,
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  • Fall '13
  • yuriyzabolotnyuk
  • Derivatives, Options, Subprime mortgage crisis, Tranche, subprime mortgages, ABS CDO

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