Why is a risk factor necessary in credit derivatives whose payout is dependent on changes to the credit spread?
Possible answers:
A: Because it reflects the extra uncertainty inherent in non-investment grade bonds
B: Because it reflects the bond's modified duration and therefore its sensitivity to yield changes
C: To enable gearing
D: Because changes to the credit spread are small and spread derivative bets are for large amounts of money作者: Colum 时间: 2011-7-11 19:17
A.
B is like a yield beta.作者: mik82 时间: 2011-7-11 19:17
and it is B and B and B
because I say it is B
:-)
Edited 1 time(s). Last edit at Thursday, May 12, 2011 at 08:38AM by pfcfaataf.作者: zwjy 时间: 2011-7-11 19:17
cuz the CFAI said so..............isay the answer is B作者: wake2000 时间: 2011-7-11 19:17
The answer is: B
The risk factor is the bond's modified duraton. This means payouts from the spread derivatives should be sufficient to cover value changes in the underlying bond.作者: Windjammer 时间: 2011-7-11 19:17
Damn, I guessed A. That was pretty tricky.
NO EXCUSES作者: NakedPuts2011 时间: 2011-7-11 19:17
You guys rock!
Duration is a Primary Risk Factor, but yield beta is not...man, simply memorizing a term didn't work.作者: bodhisattva 时间: 2011-7-11 19:17
The "risk factor" discussed here is number used in payout formula (check credit derivatives in volume 4)...作者: liangfeng 时间: 2011-7-11 19:17
B is the best possible answer.
"the risk factor is the value change of the security for a one basis point change in the credit spread." (V4, p. 125).
