Exam 29: Credit Derivative Products

Suppose that an investor has purchased $250 million of protection on the iTraxx Europe which is an equally-weighted index composed of 125 European investment-grade names.If one of the names in the index were to default,the protection seller compensates the buyer for the loss-given-default on that name on a notional of _________________,the index continue to trade on _______________ names;and all subsequent premium payments are based on a notional of______________.

A credit-sensitive note (CSN)has a coupon that is indexed to the credit rating of the issuer.When the credit rating worsens,CSNs pay a higher rate of interest and when the rating improves they pay a lower rate.Which of the following is the most valid?

What action is involved in constructing a synthetic CDO?

A first Ðto-default (FTD)basket pays off when the first default occurs in the given basket of "names." The spread on a first-to-default basket is:

Credit risk in bonds involves uncertainty about whether the bond will default (default risk),and uncertainty about the value of the bonds when they default (recovery risk).In order to profit from a view that default risk will worsen,while not taking a view on recovery risk,you would most prefer to

A collateralized default obligation (CDO)is a pool of securities (collateral)whose cash flows are tranched and sold to investors who take different levels of credit loss in the portfolio.Which of the following is the least likely to be seen in a the collateral of a CDO.

Assume that the CDX-iTraxx index has 125 names in it,for a total notional of $100,000,000.If the recovery rate on default of any name is 40%,at least how many names must default for the 3-7% tranche of the CDO to be wiped out?

A settlement squeeze in the credit default swap market is least likely to occur when the CDS contracts are

In a typical Credit Linked Note structure,a special-purpose vehicle (SPV)issues notes tied to the credit performance of a reference obligation.Buyers of these notes are protection on the reference obligation and are the risk of the SPV mismanaging the collateral

Suppose an investor wishes to sell protection on $10 million of the CDX Index where the fixed spread is 100 bps.If the current spread on the index is 150 bps,then the investor will receive

The fair price of a CDS contract on a reference bond is equivalent to that of a spread on a floating-rate bond issued by the same entity as the reference bond and that

The asset swap spread is

A $100 million CDO has tranches running from loss ranges of: 0-3%,3-7%,7-10%,10-15%,and greater than 15%.The 7-10% tranche may be stated equivalently as

Which of the following is not one of the three "C"s of lending in banking?

A first-to-default (FTD)basket option pays off when any one of the companies in a credit basket defaults.The price of the FTD basket decreases when

CDS settlement is not likely to be triggered by which of the following events?

Bank A is able to raise funds at Libor.Bank B does so at Libor + 30 bps.Bank A buys a reference credit risky asset returning Libor + 70 bps,and then,A and B contract with each other on a credit swap (CDS)where A buys protection on the reference asset from B for $y$ bps.What range of basis points $y$ would be acceptable to both parties in the contract?

The "base" correlation in a CDO is

Bank A has a funding cost of $L + 10$ basis points,where $L$ is Libor.Bank B has funding cost of $L + 80$ basis points.There is a reference obligation currently yielding $L + 140$ basis points.In a "Funding Cost Arbitrage," Bank A pays B the total return on the reference obligation in exchange for a payment of $L + x$ basis points by Bank B,where:

Which of the following statements is valid?