Question 1

Which of the following is true of a synthetic CDO?

Accepted Answer

A) It is created from portfolios of bonds 
B) It is created from portfolios of CDSs 
C) It references a standard portfolio of bonds 
D) None of the above 
A) It is created from portfolios of bonds 
B) It is created from portfolios of CDSs 
C) It references a standard portfolio of bonds 
D) None of the above B

Question 2

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 A

Question 3

In a one-year forward contract on a CDS that will last five years,what usually happens if there is a default during the first year?

Accepted Answer

A) There is a payoff to the forward protection buyer at the time of default 
B) There is a payoff to the forward protection buyer at the end of one year 
C) There is a payoff to the forward protection buyer at the end of six years 
D) The contract ceases to exist 
A) There is a payoff to the forward protection buyer at the time of default 
B) There is a payoff to the forward protection buyer at the end of one year 
C) There is a payoff to the forward protection buyer at the end of six years 
D) The contract ceases to exist D

Question 4

Which of the following is the most popular life for a credit default swap?

Accepted Answer

A) 1 year 
B) 3 years 
C) 5 years 
D) 10 years 
A) 1 year 
B) 3 years 
C) 5 years 
D) 10 years

Question 5

Which of the following happens when the default correlation of the companies underlying a CDO increases?

Accepted Answer

A) The value of the senior tranche and the equity tranche to the protection buyer both increase 
B) The value of the senior tranche and the equity tranche to the protection buyer both decrease 
C) The value of the senior tranche to the protection buyer decreases and the value of the equity tranche to the protection buyer increases 
D) The value of the senior tranche to the protection buyer increases and the value of the equity tranche to the protection buyer decreases 
A) The value of the senior tranche and the equity tranche to the protection buyer both increase 
B) The value of the senior tranche and the equity tranche to the protection buyer both decrease 
C) The value of the senior tranche to the protection buyer decreases and the value of the equity tranche to the protection buyer increases 
D) The value of the senior tranche to the protection buyer increases and the value of the equity tranche to the protection buyer decreases

Question 6

A CDS with a number of reference entities provides a payoff when any of the reference entities defaults.What is a name for this CDS?

Accepted Answer

A) Binary CDS 
B) Add-up Basket CDS 
C) First-to-Default CDS 
D) n-to-Default CDS 
A) Binary CDS 
B) Add-up Basket CDS 
C) First-to-Default CDS 
D) n-to-Default CDS

Question 7

Which of the following best describes a total return swap?

Accepted Answer

A) It exchanges the realized return on an asset.including both income and capital gains/losses.for a return.equal to LIBOR plus a spread on the initial value of the asset 
B) It exchanges the promised return on an asset.including both income and capital gains/losses.for a return equal to LIBOR plus a spread on the initial value of the asset 
C) It exchanges the realized return on an asset.including income but not capital gains/losses.for a return equal to LIBOR plus a spread on the initial value of the asset 
D) It exchanges the promised return on an asset.including income but not capital gains/losses.for a return equal to LIBOR plus a spread on the initial value of the asset 
A) It exchanges the realized return on an asset.including both income and capital gains/losses.for a return.equal to LIBOR plus a spread on the initial value of the asset 
B) It exchanges the promised return on an asset.including both income and capital gains/losses.for a return equal to LIBOR plus a spread on the initial value of the asset 
C) It exchanges the realized return on an asset.including income but not capital gains/losses.for a return equal to LIBOR plus a spread on the initial value of the asset 
D) It exchanges the promised return on an asset.including income but not capital gains/losses.for a return equal to LIBOR plus a spread on the initial value of the asset

Question 8

In a CDS with a notional principal of $100 million the reference entity defaults.What is the payoff to the buyer of protection when the recovery rate is 30%?

Accepted Answer

A) $100 million 
B) $30 million 
C) $130 million 
D) $70 million 
A) $100 million 
B) $30 million 
C) $130 million 
D) $70 million

Question 9

What is the number of companies underlying the CDX NA IG index?

Accepted Answer

A) 50 
B) 75 
C) 100 
D) 125 
A) 50 
B) 75 
C) 100 
D) 125

Question 10

What is the number of companies underlying the iTraxx index?

Accepted Answer

A) 50 
B) 75 
C) 100 
D) 125 
A) 50 
B) 75 
C) 100 
D) 125

Question 11

In the Lehman bankruptcy the payoff to people who had bought CDS protection was 91.375% of the notional principal.How was this determined?

Accepted Answer

A) By calculation of the cheapest-to-deliver bond 
B) By an auction process 
C) By a calculation agent 
D) By Lehman's liquidators 
A) By calculation of the cheapest-to-deliver bond 
B) By an auction process 
C) By a calculation agent 
D) By Lehman's liquidators

Question 12

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%

Question 13

If the CDS spread for a regular 5-year CDS is 120 basis points,what is the CDS spread for a 5-year binary CDS on the same underlying reference entity? Assume a recovery rate of 40%.

Accepted Answer

A) 48 basis points 
B) 72 basis points 
C) 200 basis points 
D) 300 basis points 
A) 48 basis points 
B) 72 basis points 
C) 200 basis points 
D) 300 basis points

Question 14

If a tranche spread is 55 basis points and the fixed coupon is 60 basis points,which of the following happens when a trader buys protection?

Accepted Answer

A) The trader pays an estimate of the present value of 5 basis points per year and then pays 55 basis points per year 
B) The trader pays an estimate of the present value of 5 basis points per year and then pays 60 basis points per year 
C) The trader receives an estimate of the present value of 5 basis points per year and then pays 55 basis points per year 
D) The trader receives an estimate of the present value of 5 basis points per year and then pays 60 basis points per year 
A) The trader pays an estimate of the present value of 5 basis points per year and then pays 55 basis points per year 
B) The trader pays an estimate of the present value of 5 basis points per year and then pays 60 basis points per year 
C) The trader receives an estimate of the present value of 5 basis points per year and then pays 55 basis points per year 
D) The trader receives an estimate of the present value of 5 basis points per year and then pays 60 basis points per year

Question 15

What is the rating of the companies underlying the iTraxx index?

Accepted Answer

A) A or above 
B) BBB or above 
C) BB or below 
D) BBB or below 
A) A or above 
B) BBB or above 
C) BB or below 
D) BBB or below

Question 16

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 17

If the CDS-bond basis is X minus Y,what are X and Y?

Accepted Answer

A) X is the CDS spread and Y is the excess of the bond yield over the swap rate 
B) X is the excess of the bond yield over the swap rate and Y is the CDS spread 
C) X is the CDS spread and Y is the excess of the bond yield over the Treasury rate 
D) X is the excess of the bond yield over the Treasury rate and Y is the CDS spread 
A) X is the CDS spread and Y is the excess of the bond yield over the swap rate 
B) X is the excess of the bond yield over the swap rate and Y is the CDS spread 
C) X is the CDS spread and Y is the excess of the bond yield over the Treasury rate 
D) X is the excess of the bond yield over the Treasury rate and Y is the CDS spread

Question 18

Which of the following is true about a CDS?

Accepted Answer

A) Restructuring is never a credit event 
B) Restructuring is always a credit event 
C) Certain types of restructuring qualify as credit events but others do not 
D) Sometimes a CDS is defined so that restructuring is a credit event and sometimes it is not 
A) Restructuring is never a credit event 
B) Restructuring is always a credit event 
C) Certain types of restructuring qualify as credit events but others do not 
D) Sometimes a CDS is defined so that restructuring is a credit event and sometimes it is not

Question 19

For what range of losses is the equity tranche of iTraxx (or CDX NA IG)responsible?

Accepted Answer

A) 0 to 10% 
B) 0 to 7% 
C) 0 to 6% 
D) 0 to 3% 
A) 0 to 10% 
B) 0 to 7% 
C) 0 to 6% 
D) 0 to 3%

Question 20

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%

Exam 23: Credit Derivatives

Which of the following is true of a synthetic CDO?

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

In a one-year forward contract on a CDS that will last five years,what usually happens if there is a default during the first year?

Which of the following is the most popular life for a credit default swap?

Which of the following happens when the default correlation of the companies underlying a CDO increases?

A CDS with a number of reference entities provides a payoff when any of the reference entities defaults.What is a name for this CDS?

Which of the following best describes a total return swap?

In a CDS with a notional principal of $100 million the reference entity defaults.What is the payoff to the buyer of protection when the recovery rate is 30%?

What is the number of companies underlying the CDX NA IG index?

What is the number of companies underlying the iTraxx index?

In the Lehman bankruptcy the payoff to people who had bought CDS protection was 91.375% of the notional principal.How was this determined?

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?

If the CDS spread for a regular 5-year CDS is 120 basis points,what is the CDS spread for a 5-year binary CDS on the same underlying reference entity? Assume a recovery rate of 40%.

If a tranche spread is 55 basis points and the fixed coupon is 60 basis points,which of the following happens when a trader buys protection?

What is the rating of the companies underlying the iTraxx index?

Which of the following is true?

If the CDS-bond basis is X minus Y,what are X and Y?

Which of the following is true about a CDS?

For what range of losses is the equity tranche of iTraxx (or CDX NA IG)responsible?

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

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

Introduction to Binomial Trees

Valuing Stock Options: The BSM Model

Employee Stock Options

Options on Stock Indices and Currencies

Futures Options

The Greek Letters

Binomial Trees in Practice

Volatility Smiles

Value at Risk

Interest Rate Options

Exotic Options and Other Nonstandard Products

Weather, Energy, and Insurance Derivatives

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