Exam 31: Market for Credit Risk Transfer Vehicles: Credit Derivatives and Collateralized Debt Obligations

A CRT vehicle can result in either the transfer of the credit risk from one bank to another or from a bank to a nonbank entity.

Portfolio managers can have a dealer create a ________ equal to the maturity of the reference obligation or have it constructed for a shorter time period to match the manager's investment horizon.

The interdealer market has evolved to where single-name credit default swaps for corporate and sovereign reference entities are ________.

In regards to a CDO structure, at least an A rating is typically sought for the ________ at least a B rating is sought for the ________.

Cash CDOs went a long way in providing banks with the opportunity to better manage their balance sheet. However, problems with cash CDOs including ________.

A CDO is a security backed by a diversified pool of equity securities.

The introduction of ________ vehicles, such as cash CDOs and credit derivatives that are employed to create synthetic CDOs, has elicited the same cautious response from overseers of the global banking system.

Which of the below statements is FALSE?

Which of the below statements is TRUE?

Credit derivative products have a payout that is contingent upon a credit event occurring. The ISDA provides definitions of credit events. The 1999 ISDA Credit Derivatives Definitions (referred to as the "1999 Definitions") provides a list of eight credit events. (a) Name four of these eight credit events. (b) What do these events attempt to capture?

There are eight types of credit events possible, the most controversial being restructuring.

Assume a hypothetical credit default swap where the notional amount is $10 million and there are 92 actual days in a quarter. If the swap premium is 400 basis points (0.04), what is the quarterly swap premium payment made by the protection buyer?

There are four types of credit default swaps: single-name credit default swap, multiple-name credit default swap, basket credit default swaps, and credit default swap indexes.

________ means that if a credit event as defined by the documentation occurs, the reference obligation is delivered by the protection buyer to the protection seller in exchange for a cash payment.

In determining whether or not to create a CDO, dealers will look to see if there is a potential return available to the equity tranche of ________.

By whom and for what reasons are credit derivatives used? Give an example.