Hull_OFOD9e_MultipleChoice_Questions_and_Answers_Ch08 -...

Info icon This preview shows pages 1–3. Sign up to view the full content.

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,
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.
  • Fall '13
  • yuriyzabolotnyuk
  • Derivatives, Options, Subprime mortgage crisis, Tranche, subprime mortgages, ABS CDO

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern