Hull_OFOD9e_MultipleChoice_Questions_and_Answers_Ch09

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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 with Answers 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 Answer: B Derivatives markets used LIBOR as the discount rate pre-crisis. 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 Derivatives markets have used the OIS rate as the discount rate for collateralized transactions since the crisis. 3. Which of the following is true OIS rates are less than LIBOR /swap rates when both have the same maturity. 4. Which of the following describes a 3-month overnight indexed swap (OIS)?
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The OIS rate is the rate exchanged for the geometric average of overnight rates. In the U.S. the overnight rate is the fed funds rate 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 discounting D. Either A or B can be true Answer: C When the yield curves are flat, all forward LIBOR rates are 3% regardless of whether OIS or LIBOR discounting is used. This is because, when all forward LIBOR rates equal 3%, all exchanges on all swaps are worth zero regardless of the discount rate used.
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