Question 1

CVA stands for

Accepted Answer

A) Collateral value adjustment 
B) Credit value adjustment 
C) Credit value agreement 
D) Collateral value agreement 
A) Collateral value adjustment 
B) Credit value adjustment 
C) Credit value agreement 
D) Collateral value agreement B

Question 2

Which of the following is true when a bank uses OIS discounting for valuing a LIBOR-for-fixed swap

Accepted Answer

A) The LIBOR/swap zero curve is calculated before the OIS zero curve 
B) The OIS zero curve is calculated before the LIBOR/swap zero curve 
C) The swap is valued using OIS forward rates and OIS discounting 
D) The forward rates are calculated from the bank's borrowing costs 
A) The LIBOR/swap zero curve is calculated before the OIS zero curve 
B) The OIS zero curve is calculated before the LIBOR/swap zero curve 
C) The swap is valued using OIS forward rates and OIS discounting 
D) The forward rates are calculated from the bank's borrowing costs B

Question 3

Suppose that OIS rates of all maturities are 6% per annum,continuously compounded.The one-year LIBOR rate is 6.4%,annually compounded and the two-year swap rate for a swap where payments are exchanged annually is 6.8%,annually compounded.
-Which of the following is closest to the LIBOR forward rate for the second year when LIBOR discounting is used and the rate is expressed with annual compounding

Accepted Answer

A) 7.199% 
B) 7.221% 
C) 7.223% 
D) 7.225% 
A) 7.199% 
B) 7.221% 
C) 7.223% 
D) 7.225% C

Question 4

In the U.S.,which of the following is true about Treasury instruments

Accepted Answer

A) Their income is not subject to tax at the state level 
B) Their income is not subject to tax at the federal level 
C) Both A and B are true 
D) They are not subject to capital gains tax at the federal level 
A) Their income is not subject to tax at the state level 
B) Their income is not subject to tax at the federal level 
C) Both A and B are true 
D) They are not subject to capital gains tax at the federal level

Question 5

As a bank`s borrowing rate increases,which of the following is true if a bank calculates FVA

Accepted Answer

A) FVA increases 
B) FVA declines 
C) FVA stays the same 
D) FVA may increase or decline. 
A) FVA increases 
B) FVA declines 
C) FVA stays the same 
D) FVA may increase or decline.

Question 6

A bank has three uncollateralized transactions with a counterparty worth +$10 million,-$20 million and +$25 million.A netting agreement is in place.What is the maximum loss if the counterparty defaults today.

Accepted Answer

A) $15 million 
B) $35 million 
C) $20 million 
D) Zero 
A) $15 million 
B) $35 million 
C) $20 million 
D) Zero

Question 7

Which of the following is true

Accepted Answer

A) CVA and DVA can be calculated deal by deal 
B) CVA and DVA must both be calculated for the whole portfolio a bank has with a counterparty 
C) CVA can be calculated deal by deal but DVA must be calculated for a portfolio 
D) DVA can be calculated deal by deal but CVA must be calculated for a portfolio 
A) CVA and DVA can be calculated deal by deal 
B) CVA and DVA must both be calculated for the whole portfolio a bank has with a counterparty 
C) CVA can be calculated deal by deal but DVA must be calculated for a portfolio 
D) DVA can be calculated deal by deal but CVA must be calculated for a portfolio

Question 8

Since the 2008 credit crisis

Accepted Answer

A) LIBOR has replaced OIS as the discount rate for non-collateralized swaps 
B) OIS has replaced LIBOR as the discount rate for non-collateralized swaps 
C) LIBOR has replaced OIS as the discount rate for collateralized swaps 
D) OIS has replaced LIBOR as the discount rate for collateralized swaps 
A) LIBOR has replaced OIS as the discount rate for non-collateralized swaps 
B) OIS has replaced LIBOR as the discount rate for non-collateralized swaps 
C) LIBOR has replaced OIS as the discount rate for collateralized swaps 
D) OIS has replaced LIBOR as the discount rate for collateralized swaps

Question 9

Which of the following involves most credit risk

Accepted Answer

A) Exchange trading 
B) OTC trading with a central clearing party being used 
C) OTC trading with bilateral clearing and collateral being posted 
D) OTC trading with bilateral clearing and no collateral being posted 
A) Exchange trading 
B) OTC trading with a central clearing party being used 
C) OTC trading with bilateral clearing and collateral being posted 
D) OTC trading with bilateral clearing and no collateral being posted

Question 10

Accountants like to value a derivatives portfolio at

Accepted Answer

A) The bid price 
B) The offer price 
C) The exit price 
D) Original cost less depreciation 
A) The bid price 
B) The offer price 
C) The exit price 
D) Original cost less depreciation

Question 11

When a bank's borrowing rate goes up,which of the following is true

Accepted Answer

A) DVA increases so that the bank's profit goes down 
B) DVA increases so that the bank's profit goes up 
C) DVA declines so that the bank's profit goes down 
D) DVA declines so that the bank's profit goes up 
A) DVA increases so that the bank's profit goes down 
B) DVA increases so that the bank's profit goes up 
C) DVA declines so that the bank's profit goes down 
D) DVA declines so that the bank's profit goes up

Question 12

Which of the following is true

Accepted Answer

A) OIS rates are less than the corresponding LIBOR/swap rates 
B) OIS rates are greater than corresponding LIBOR/swap rates 
C) OIS rates are sometimes greater and sometimes less than LIBOR/swap rates 
D) OIS rates are equivalent to one-day LIBOR rates 
A) OIS rates are less than the corresponding LIBOR/swap rates 
B) OIS rates are greater than corresponding LIBOR/swap rates 
C) OIS rates are sometimes greater and sometimes less than LIBOR/swap rates 
D) OIS rates are equivalent to one-day LIBOR rates

Question 13

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

Accepted Answer

A) The Treasury rate 
B) The LIBOR rate 
C) The repo rate 
D) The overnight indexed swap rate 
A) The Treasury rate 
B) The LIBOR rate 
C) The repo rate 
D) The overnight indexed swap rate

Question 14

In a fully collateralized transaction which of the following leads to a pricing adjustment

Accepted Answer

A) The rate paid on cash collateral is the fed funds rate 
B) The rate paid on cash collateral is greater than the fed funds rate 
C) The rate paid on cash collateral is less than the fed funds rate 
D) Both B and C 
A) The rate paid on cash collateral is the fed funds rate 
B) The rate paid on cash collateral is greater than the fed funds rate 
C) The rate paid on cash collateral is less than the fed funds rate 
D) Both B and C

Question 15

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

Accepted Answer

A) The Treasury rate 
B) The LIBOR rate 
C) The repo rate 
D) The overnight indexed swap rate 
A) The Treasury rate 
B) The LIBOR rate 
C) The repo rate 
D) The overnight indexed swap rate

Question 16

Which of the following describes a 3-month overnight indexed swap (OIS)?

Accepted Answer

A) A fixed rate is exchanged for the overnight rate every day for three months 
B) LIBOR is exchanged for the overnight rate every day for three months 
C) The arithmetic average of overnight rates is exchanged for a fixed rate at the end of three months 
D) The geometric average of overnight rates is exchanged for a fixed rate at the end of three months 
A) A fixed rate is exchanged for the overnight rate every day for three months 
B) LIBOR is exchanged for the overnight rate every day for three months 
C) The arithmetic average of overnight rates is exchanged for a fixed rate at the end of three months 
D) The geometric average of overnight rates is exchanged for a fixed rate at the end of three months

Question 17

Suppose that OIS rates for all maturities are 2.5% and swap rates for all maturities are 3%.Which of the following is true?

Accepted Answer

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 
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

Question 18

In October 2008 the three-month LIBOR-OIS spread rose to

Accepted Answer

A) 231 basis points 
B) 364 basis points 
C) 450 basis points 
D) 520 basis points 
A) 231 basis points 
B) 364 basis points 
C) 450 basis points 
D) 520 basis points

Question 19

Suppose that OIS rates of all maturities are 6% per annum,continuously compounded.The one-year LIBOR rate is 6.4%,annually compounded and the two-year swap rate for a swap where payments are exchanged annually is 6.8%,annually compounded.
-Which of the following is closest to the LIBOR forward rate for the second year when OIS discounting is used and the rate is expressed with annual compounding?

Accepted Answer

A) 7.199% 
B) 7.221% 
C) 7.223% 
D) 7.225% 
A) 7.199% 
B) 7.221% 
C) 7.223% 
D) 7.225%

Question 20

It is assumed that a company can default after one year or after two years.The probability of default at each time is 1.5%.The present value of the expected loss to a bank on a derivatives portfolio if the company defaults after one year is estimated to be $1 million.The present value of the expected loss if it defaults after two years is estimated to be $2 million.Which of the following is the bank's CVA ?

Accepted Answer

A) $3,000,000 
B) $300,000 
C) $450,000 
D) $150,000 
A) $3,000,000 
B) $300,000 
C) $450,000 
D) $150,000

Exam 9: OIS Discounting, Credit Issues, and Funding Costs

CVA stands for

Which of the following is true when a bank uses OIS discounting for valuing a LIBOR-for-fixed swap

In the U.S.,which of the following is true about Treasury instruments

As a bank`s borrowing rate increases,which of the following is true if a bank calculates FVA

A bank has three uncollateralized transactions with a counterparty worth +$10 million,-$20 million and +$25 million.A netting agreement is in place.What is the maximum loss if the counterparty defaults today.

Which of the following is true

Since the 2008 credit crisis

Which of the following involves most credit risk

Accountants like to value a derivatives portfolio at

When a bank's borrowing rate goes up,which of the following is true

Which of the following is true

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

In a fully collateralized transaction which of the following leads to a pricing adjustment

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

Which of the following describes a 3-month overnight indexed swap (OIS)?

Suppose that OIS rates for all maturities are 2.5% and swap rates for all maturities are 3%.Which of the following is true?

In October 2008 the three-month LIBOR-OIS spread rose to

Introduction

Mechanics of Futures Markets

Hedging Strategies Using Futures

Interest Rates

Determination of Forward and Futures Prices

Interest Rate Futures

Swaps

Securitization and the Credit Crisis of 2007

Mechanics of Options Markets

Properties of Stock Options

Trading Strategies Involving Options

Binomial Trees

Wiener Processes and Ito’s Lemma

The Black-Scholes-Merton Model

Employee Stock Options

Options on Stock Indices and Currencies

Futures Options

The Greek Letters

Volatility Smiles

Basic Numerical Procedures

Value at Risk

Estimating Volatilities and Correlations

Credit Risk

Credit Derivatives

Exotic Options

Filters