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This test consists of 15 multiple choice questions and 5 short answer questions.

Multiple Choice Questions

1. In 1998, what were many hedge funds selling insurance against?
(a) The Latin market.
(b) The U.S. Treasury.
(c) Falling prices.
(d) Rising prices.

2. At what level was the swap rate of the United States in April 1998?
(a) Low.
(b) Non-existant.
(c) High.
(d) Medium.

3. What was the limitation on borrowing for equity trading?
(a) 40%.
(b) 10%.
(c) 25%.
(d) 50%.

4. Where did the private contracts Long-Term made in 1998 trade?
(a) On the exchange.
(b) Overseas.
(c) In Russia.
(d) Privately.

5. After the financial crisis in Russia, what did Long-Term regret?
(a) All of these.
(b) Creating private deals.
(c) Forcing investors to take back money.
(d) Creating deals that were not liquid.

6. What was the dollar amount of the premium Long-Term paid for its loan?
(a) $289 million.
(b) $200 million.
(c) $1 billion.
(d) $100 million.

7. Once crisis hit, how many weeks did it take for the partners to lose $3.6 billion?
(a) 1.
(b) 5.
(c) 20.
(d) 52.

8. What did the Fed Chairman want to remove in an effort to create liquidity in the market?
(a) Margin rules.
(b) Trading rules.
(c) Short rules.
(d) Stock rules.

9. What did Long-Term risk losing if they allowed their assets to fall below five hundred million dollars?
(a) The right to trade.
(b) Their relationships with bankers.
(c) Their office.
(d) Their workers.

10. In 1998, who published Meriwether's letter to his clients?
(a) The New Yorker.
(b) Bloomberg.
(c) The New York Times.
(d) The Financial Times.

11. In 1996, why was it difficult to continue to find strong profits in arbitrage trades?
(a) It was illegal to perform these trades.
(b) Long-Term did not have investment capital.
(c) The market did not have enough players.
(d) The market was over-saturated.

12. How much money did Chase loan Long-Term so that they could continue to clear trades?
(a) $5 million.
(b) $10 million.
(c) $475 million.
(d) $752 million.

13. When Russia began to default on its loans, what did people start doing with their high risk bonds?
(a) Selling.
(b) Buying.
(c) Holding.
(d) Trading.

14. What did Scholes and Merton think of some of the private trades Long-Term made in 1998?
(a) They were impressed.
(b) They were excited.
(c) They supported them.
(d) They did not support them.

15. How did regulators respond to the involvement of banks in the derivatives market?
(a) They encouraged it.
(b) They were delighted.
(c) There were not concerned.
(d) They were worried.

Short Answer Questions

1. Who did Long-Term threaten to sue, following a threat not to clear trades?

2. When the financial market in Russia collapsed, what were many in the market attempting to do?

3. What notable player was on vacation during the crisis in Russia?

4. What did Long-Term avoid by working with derivatives instead of stocks?

5. Who suspended arbitrage operations in April 1998?

(see the answer keys)

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