Hull:Options,Futures,andOtherDerivatives,NinthEditionChapter8:SecuritizationandtheCreditCrisisof2007MultipleChoiceTestBank:QuestionswithAnswers1.Whichofthefollowingtendstoleadtoanincreaseinhouseprices?A.AnincreaseininterestratesB.Regulatorsspecifyingamaximumlevelfortheloan-to-valueratioonmortgagesC.BanksreducingtheminimumFICOscorethatborrowersarerequiredtohaveD.AnincreaseinforeclosuresAnswer:CAnincreaseininterestratestendstolowerhousepricesbecausebuyershavehigherfinancingcosts.Limitingtheloan-to-valueratiomeansthatsomepotentialbuyerscannotgetthemortgagestheyrequireandthereislessdemandforhouseswiththeresultthatpricestendtodecline.Anincreaseinforeclosuresincreasessupplyandthisalsolowersprices.However,ifbanksrelaxtheirlendingstandards(e.g.byreducingtheminimumFICOscorestheyrequire)demandshouldincreasebecausemorepeoplecangetmortgages.Asaresultpriceswillincrease.2.Whichofthefollowingistrueofanon-recoursemortgage?A.Thehousebuyer,ifunabletomakepayments,canloseallhisorherpossessionsB.ThehousebuyerhasanAmerican-styleputoptiononthehouseC.ThehousebuyerhasaEuropean-styleputoptiononthehouseD.ThelenderislesslikelytolosemoneyonthemortgageAnswer:BInanon-recoursemortgagealendercannotseizeotherassetsoftheborrowerbesidesthehouseinordertoberepaid.Thismeansthatifthepriceofthehousedeclinesbelowthebalanceoutstandingonthemortgagetheborrowercaninprinciplegivethehousetothelenderinreturnfortearingupthemortgage.TheborrowerthereforehasanAmericanstyleputoptiontosellthehousefortheamountoutstandingonthemortgage.3.WhichofthefollowingisNOTtrueA.Thebonusstructureatbankscanleadtoshort-termhorizonsfordecisionmakingB.SecuritizationinvolvesthetransferofriskC.Theterm“agencycosts”describesthesituationwheretheincentivesoftwopartiesinabusinessrelationshiparenotperfectlyalignedD.CorrelationsdecreaseinstressedmarketconditionsAnswer:DA,B,andCaretrue.Disnotbecausecorrelationstendtoincrease,notdecrease,instressedmarkets,4.SupposethatABSsarecreatedfromportfoliosofsubprimemortgageswiththefollowingallocationofth...
