66. Suppose the rate on Company A’s one-year zero-coupon bond is 10.0% and the one-year T-bill rate is 8.0%. assume the T-bill is riskless and the probability of default of Company A’s bond is 10%. What is the loss given default of Company A’ bond?

a.  18.2%

b.  81.8%

c.  20.0%

d.  80.0%

67.The last five months have seen extreme market volatility. Stock markets have experienced wide daily swing as rumors were surfacing about imminent interest rate decreases and high loan defaults. Your small bank, which has been experiencing increasing defaults on its consumer loans, has securitized and sold many of its loans but is now finding this balance sheet management option increasingly difficult to execute. Your bank is currently well capitalized, with many of its assets represented by in-the-money swaps and certificates of deposit. Which of the following are accurate statements?

i.  Both contingent liability and claim holders putting their demands to the bank in amounts greater than you were anticipating will increase liquidity demands and result in higher costs to your bank.

ii.  Higher daily volatility is not a material issue as the net effect on your credit portfolio should not result in lower realized returns.

iii.  As your bank has securitized much of its loan portfolio and is well capitalized, it has effectively isolated itself from a liquidity crunch even in times of extreme market volatility.

iv.  The cost of negotiating for liquidity will be higher for your bank given its portfolio composition.

a.        ii, iii, and iv only

b.       ii and iii only

c.       i and iv only

d.       i and ii only

68. Research and model projections indicate that a specific event is likely to move the CHF against the USD. While the direction of the move is highly uncertain, it is highly likely that magnitude of the move will be significant. Based on this information, which of the following strategies would provide the largest economic benefit?

a.  Long a call option on USD/CHF and long a put option on USD/CHF with the same strike price and expiration date.

b.  Long a call option on USD/CHF and short a put option on USD/CHF with the same strike price and expiration date.

c.  Short a call option on USD/CHF and short a put option on USD/CHF with the same strike price and expiration date.

d.  Short a call option on USD/CHF and long a put option on USD/CHF with the same strike price and expiration date.

69. A bank holds USD 60 million worth of 10-year 6.5% coupon bonds that are trading at a clean price of USD 101.82. The bank is worried by the exposure due to these bonds but cannot unwind the position for fear of upsetting the client. Therefore, it purchases a total return swap (TRS) in which it receives annual LIBOR + 100 bps in return for the mark-to market return on the bond. For the first year, the LIBOR sets at 6.25%, and by the end of the year the clean price of the bonds is at USD 99.35. The net receipt/ payment for the bank in the total return swap will be to:

a.  receive USD 1.93 million

b.  receive USD 2.23 million

c.  pay USD 2.23 million

d.  pay USD 1.93 million

70. Which of the following statements about stress tests is false?

a.  Stress testing can be used to provide information about losses that may occur under extreme adverse market conditions.

b.  The zero-out stress scenarios do not utilize actual market events, but instead hypothesize extreme scenarios of various magnitudes about a single risk factor or a small group of risk factors.

c.  Stress tests cannot be used in VaR estimates.

d.  The anticipatory stress scenario with stress correlations assumes that a different covariance matrix is relevant during periods of stress.