Explanation
In an interest rate swap, only the net payment is made. In this case,
- the customer pays the bank 4%*(3/12)*$100m
- the bank owes the customer (2% + 100bp))*(3/12)*$100m
Therefore the customer pays (4% - (2% + 100bp))*(3/12)*$100m. 3/12 represents the 3 month time interval.
This is equal to a net payment of $250k from the customer to the bank. Therefore Choice 'c' is the correct answer and the rest are incorrect.

Explanation
A residential mortgage carries a prepayment option for the borrower, where in the event of a decrease in interest rates they are likely to repay the mortgage and refinance at the new lower rate. If rates go up, the bank does not have a similar option. If the volatility of the underlying interest rates increases, mortgage holders are more likely to be faced with new rates that are sufficiently lower to persuade them to refinance. This reduces the ability of the bank to continue to earn the higher interest rate it was earning before.
Therefore an increase in volatility of the mortgage interest rates decreases the value of the mortgage portfolio.
The same rationale applies to callable bonds, where the borrower has the option to call the bond.

Explanation
The implied volatility for a call and a put is identical if the two have the same strike and expiry. Therefore Choice 'b' is the correct answer and the remaining choices are incorrect.

Explanation
https://riskprep.com/images/stories/questions/102.07.a.png is the coefficient of risk aversion at x. Its inverse, ie https://riskprep.com/images/stories/questions/102.07.b.png, is called the coefficient of risk tolerance.


Risk aversion or risk tolerance is indicated in a utility function by its curvature. A concave utility function indicates risk aversion and a convex function indicates risk tolerance. The curvature is measured as a ratio of the second derivative to the first derivative of a function. A negative second derivative implies concavity. The expression - is the coefficient of risk aversion, and its inverse, which is in the same units as wealth, is called the coefficient of risk tolerance.

Explanation
The efficient frontier is a two dimensional plot with volatility and returns on its axes. For a given level of return, it helps identify the portfolio with the lowest volatility. From the other axis, it helps identify the portfolio with the highest return for a given level of volatility.
Therefore Choice 'b' is the correct answer. Note that in the exam you may be asked the question slightly differently.