Question 1

Which of the following is true of Merton's model:

Accepted Answer

A) The equity is a call option on the assets 
B) The assets are a call option on the debt 
C) The debt is a call option on the equity 
D) The equity is a call option on the debt 
A) The equity is a call option on the assets 
B) The assets are a call option on the debt 
C) The debt is a call option on the equity 
D) The equity is a call option on the debt A

Question 2

A derivatives dealer has a single transaction with a company which is a long position in a five-year option.The Black-Scholes-Merton value of the option is $6.Suppose that the credit spread on five-year bonds issued by the company is 100 basis points.What is the dealer's CVA per option purchased from the counterparty?

Accepted Answer

A) $0.19 
B) $1.19 
C) $0.29 
D) $1.29 
A) $0.19 
B) $1.19 
C) $0.29 
D) $1.29 C

Question 3

Which of the following is true

Accepted Answer

A) The Gaussian copula model assumes that the defaults of different companies are independent. 
B) The Gaussian copula model assumes that defaults, conditional on the value of a factor , are independent. 
C) The Gaussian copula model assumes that the number of defaults is normally distributed. 
D) None of the above. 
A) The Gaussian copula model assumes that the defaults of different companies are independent. 
B) The Gaussian copula model assumes that defaults, conditional on the value of a factor , are independent. 
C) The Gaussian copula model assumes that the number of defaults is normally distributed. 
D) None of the above. B

Question 4

A hazard rate is 1% per annum.What is the probability of a default during the first two years?

Accepted Answer

A) 2.00% 
B) 2.02% 
C) 1.98% 
D) 1.96% 
A) 2.00% 
B) 2.02% 
C) 1.98% 
D) 1.96%

Question 5

In the Gaussian copula model which of the following is true

Accepted Answer

A) The time to default for a company is assumed to be normally distributed. 
B) The time to default for a company is assumed to be lognormally distributed 
C) The time to default for a company is transformed to a normal distribution 
D) The time to default for a company is transformed to a lognormal distribution 
A) The time to default for a company is assumed to be normally distributed. 
B) The time to default for a company is assumed to be lognormally distributed 
C) The time to default for a company is transformed to a normal distribution 
D) The time to default for a company is transformed to a lognormal distribution

Question 6

Which of the following is true

Accepted Answer

A)  Downgrade triggers are particularly valuable if they are widely used by a company's 	counterparties 
B) Downgrade triggers become less valuable if they are widely used by a company's counterparties 
C)  Downgrade triggers are useless because their impact is always anticipated by the market 
D)  Downgrade triggers are a two-edged sword.If company A has a downgrade trigger for 	company B then company B has a downgrade trigger for company A 
A)  Downgrade triggers are particularly valuable if they are widely used by a company's 	counterparties 
B) Downgrade triggers become less valuable if they are widely used by a company's counterparties 
C)  Downgrade triggers are useless because their impact is always anticipated by the market 
D)  Downgrade triggers are a two-edged sword.If company A has a downgrade trigger for 	company B then company B has a downgrade trigger for company A

Question 7

If a company's five year credit spread is 200 basis points and the recovery rate in the event of a default is estimated to be 20% what is the average hazard rate per year over the five years

Accepted Answer

A) 0.4% 
B) 1.2% 
C) 1.8% 
D) 2.5% 
A) 0.4% 
B) 1.2% 
C) 1.8% 
D) 2.5%

Question 8

To be investment grade,a company has to have a credit rating of

Accepted Answer

A) AA or better 
B) A or better 
C) BBB or better 
D) BB or better 
A) AA or better 
B) A or better 
C) BBB or better 
D) BB or better

Question 9

The credit spreads for a counterparty for 5 and 6 years are 2% and 2.2% respectively.The recovery rate is 60%.What is closest to the unconditional default probability for the sixth year?

Accepted Answer

A) 0.04 
B) 0.05 
C) 0.06 
D) 0.07 
A) 0.04 
B) 0.05 
C) 0.06 
D) 0.07

Question 10

Which of the following is true

Accepted Answer

A) Recovery rates are lower for investment grade companies 
B) Recovery rates are higher for non-investment grade companies 
C) Recovery rates are negatively correlated with default rates 
D) Recovery rates are positively correlated with default rates 
A) Recovery rates are lower for investment grade companies 
B) Recovery rates are higher for non-investment grade companies 
C) Recovery rates are negatively correlated with default rates 
D) Recovery rates are positively correlated with default rates

Question 11

Which of the following is usually used to define the recovery rate of a bond?

Accepted Answer

A) The value of the bond immediately after default as a percent of its face value 
B) The value of the bond immediately after default as a percent of the sum of the bond's face value and accrued interest 
C) The amount finally realized by a bondholder as a percent of face value 
D) The amount finally realized by a bondholder as a percent of the sum of the bond's face value and accrued interest 
A) The value of the bond immediately after default as a percent of its face value 
B) The value of the bond immediately after default as a percent of the sum of the bond's face value and accrued interest 
C) The amount finally realized by a bondholder as a percent of face value 
D) The amount finally realized by a bondholder as a percent of the sum of the bond's face value and accrued interest

Question 12

Which of the following is true

Accepted Answer

A) The asset swap spread is a measure of excess of the bond yield over the OIS rate 
B) The asset swap spread is a measure of excess of the bond yield over the LIBOR/swap rate 
C) An asset swap exchanges the actual return on the asset for LIBOR plus a spread 
D) None of the above 
A) The asset swap spread is a measure of excess of the bond yield over the OIS rate 
B) The asset swap spread is a measure of excess of the bond yield over the LIBOR/swap rate 
C) An asset swap exchanges the actual return on the asset for LIBOR plus a spread 
D) None of the above

Question 13

Which of the following is true of Creditmetrics when it is used to calculate credit VaR

Accepted Answer

A) Creditmetrics takes defaults but not downgrades into account 
B) Creditmetrics takes downgrades but not defaults into account 
C) Creditmetrics considers neither defaults nor downgrades 
D) Creditmetrics considers both defaults and downgrades 
A) Creditmetrics takes defaults but not downgrades into account 
B) Creditmetrics takes downgrades but not defaults into account 
C) Creditmetrics considers neither defaults nor downgrades 
D) Creditmetrics considers both defaults and downgrades

Question 14

Which of the following is true?

Accepted Answer

A) Risk neutral default probabilities are usually much lower than real world default probabilities 
B) Risk neutral default probabilities are usually much higher than real world default probabilities 
C) Risk neutral and real world probabilities must be close to each other if there are to be no arbitrage opportunities 
D) Risk-neutral default probabilities cannot be calculated from CDS spreads 
A) Risk neutral default probabilities are usually much lower than real world default probabilities 
B) Risk neutral default probabilities are usually much higher than real world default probabilities 
C) Risk neutral and real world probabilities must be close to each other if there are to be no arbitrage opportunities 
D) Risk-neutral default probabilities cannot be calculated from CDS spreads

Question 15

Which of the following is true of Merton's model:

Accepted Answer

A) The strike price is the market value of the debt 
B) The strike price is the market value of the equity 
C) The strike price is the book value of the equity 
D) The strike price is the face value of the debt 
A) The strike price is the market value of the debt 
B) The strike price is the market value of the equity 
C) The strike price is the book value of the equity 
D) The strike price is the face value of the debt

Question 16

Which of the following is true

Accepted Answer

A) Netting always leads to a reduction in a company's exposure to a counterparty 
B) Netting always leads to a company's exposure to a counterparty either staying the same or going down 
C) Netting always increases a company's exposure to a counterparty 
D) Netting can increase or reduce the exposure 
A) Netting always leads to a reduction in a company's exposure to a counterparty 
B) Netting always leads to a company's exposure to a counterparty either staying the same or going down 
C) Netting always increases a company's exposure to a counterparty 
D) Netting can increase or reduce the exposure

Question 17

Which of the following is true

Accepted Answer

A) A derivative dealer's CVA is the counterparty's DVA and vice versa 
B) Collateral posted by the counterparty reduces CVA 
C) Collateral posted by the dealer reduces DVA 
D) All of the above 
A) A derivative dealer's CVA is the counterparty's DVA and vice versa 
B) Collateral posted by the counterparty reduces CVA 
C) Collateral posted by the dealer reduces DVA 
D) All of the above

Question 18

Which of the following is true

Accepted Answer

A) Conditional default probabilities are at least as high as unconditional default probabilities 
B) Conditional default probabilities are at least as low as unconditional default probabilities 
C) Conditional default probabilities are sometimes lower and sometimes higher than unconditional default probabilities. 
D) There is no difference between conditional and unconditional default probabilities because a company can only default once. 
A) Conditional default probabilities are at least as high as unconditional default probabilities 
B) Conditional default probabilities are at least as low as unconditional default probabilities 
C) Conditional default probabilities are sometimes lower and sometimes higher than unconditional default probabilities. 
D) There is no difference between conditional and unconditional default probabilities because a company can only default once.

Question 19

Which of the following is true

Accepted Answer

A) The default probability per year for a company always increases as we look further ahead 
B) The default probability per year for a company always decreases as we look further ahead 
C) Sometimes A is true and sometimes B is true 
D) The default probability per year is roughly constant for most companies 
A) The default probability per year for a company always increases as we look further ahead 
B) The default probability per year for a company always decreases as we look further ahead 
C) Sometimes A is true and sometimes B is true 
D) The default probability per year is roughly constant for most companies

Question 20

Suppose that the cumulative probability of a company defaulting by years one,two,three and four are 3%,6.5%,10%,and 14.5%,respectively.What is the probability of default in the fourth year conditional on no earlier default?

Accepted Answer

A) 4.5% 
B) 5.0% 
C) 5.5% 
D) 6.0% 
A) 4.5% 
B) 5.0% 
C) 5.5% 
D) 6.0%

Exam 24: Credit Risk

Which of the following is true of Merton's model:

Which of the following is true

A hazard rate is 1% per annum.What is the probability of a default during the first two years?

In the Gaussian copula model which of the following is true

Which of the following is true

If a company's five year credit spread is 200 basis points and the recovery rate in the event of a default is estimated to be 20% what is the average hazard rate per year over the five years

To be investment grade,a company has to have a credit rating of

The credit spreads for a counterparty for 5 and 6 years are 2% and 2.2% respectively.The recovery rate is 60%.What is closest to the unconditional default probability for the sixth year?

Which of the following is true

Which of the following is usually used to define the recovery rate of a bond?

Which of the following is true

Which of the following is true of Creditmetrics when it is used to calculate credit VaR

Which of the following is true?

Which of the following is true of Merton's model:

Which of the following is true

Which of the following is true

Which of the following is true

Which of the following is true

Suppose that the cumulative probability of a company defaulting by years one,two,three and four are 3%,6.5%,10%,and 14.5%,respectively.What is the probability of default in the fourth year conditional on no earlier default?

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

OIS Discounting, Credit Issues, and Funding Costs

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 Derivatives

Exotic Options

Filters