Exam 29: Credit Derivative Products

Total return swaps (TRSs)are sometimes undertaken between banks who can access an asset on-balance-sheet and funds that lack access to,or are not allowed to,hold the asset.In such a situation,

Which of the following factors contributed to the the substantial growth in the market for credit derivatives in the 2000s?

A digital default swap is a contract that is distinct from a credit default swap in that

Bank A is able to raise funds at Libor + 10 bps.Bank B does so at Libor + 40 bps.Bank A buys a credit risky asset returning Libor + 100 bps,and then A and B enter into a total return swap (TRS)where A pays B the total return on the asset in return for Libor + $y$ bps.What range of basis points $y$ would be acceptable to both parties in the contract?

Today,investor A buys protection on a first-to-default basket,while investor B buys protection via Credit Default Swaps on each individual name in that basket.All contracts have the same maturity.Suppose that at maturity,it turns out that only one name out of the basket has defaulted then,

If you are interested in speculating on a deterioration in the credit quality of a company,which of the following would be appropriate?

Which of the following credit derivatives is not a pure credit risk instrument,i.e. ,is a bet on more than just credit risk?

The CDS-Bond basis is the difference in credit spreads in the CDS and bond markets,i.e. ,CDS spread minus the bond spread.Which of the following scenarios will make the basis greater,i.e. ,move it in the positive direction?

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 recovery risk will worsen,you would

Which of the following is not a property or benefit of credit derivatives?

Consider a total return swap (on a credit-risky bond)of total returns against Libor.The receiver of total return in this swap has a position that is equivalent to

Bank A holds a credit risky asset on its balance sheet.It enters into a total return swap (TRS)referenced to this asset with hedge fund B to pay the total return to B and receive Libor in return.Under what scenario does bank A bear credit risk on the reference asset this contract?