. Multiple choice

When synthetically creating a forward loan that begins at t₁ and ends at t₂, one should:

a.Buy t₁ bonds and sell t₂ bonds of amount B(t₀,t₁)/B(t₀,t₂)

b. Sell t₂ bonds and buy t₁ bonds of amount B(t₀,t₁)/B(t₀,t₂)

c. Buy LIBOR of t₀ and sell LIBOR of t₁.

d. Loan with maturity t_2, and loan with maturity t_1,as well.

. A synthetic forward loan:

a. Uses two bonds bought and sold at t₀ to create an instrument that matures at t₁.

b. Uses two bonds bought and sold at t₀ to create an instrument that matures at t₀.

c. Can be created with money market loans just as well as bonds.

d. Has an additional component of paying/receiving LIBOR

The contractual obligation equation for a forward loan can be manipulated (i.e. switched around) to:

a. Price bonds of manufactured maturities

b. Cover a mismatch (when the bank needs to own t₂ maturities, but only owns t₁ maturities) and determine a hedge to lock in t₁ funding costs.

c. Pay LIBOR instead of a fixed rate

d. Price an option based on a special

An FRA:

a. Is equivalent to swapping a series of LIBOR payments against a series of fixed rate payments (usually just one swap, not a series - that would be a swap)

b. Can be created using deposits, loans and LIBOR

c. Can be rolled from time-period to time-period

d. Can be used to effectively price tail-risk