aianjie

 

14、The type of basket default swap that usually makes a payment on the default of a single reference entity and then terminates is the:

A) inverted swap.

B) Nth-to-default swap. 

C) senior basket default swap.

D) subordinate basket default swap.

aianjie

 

The correct answer is B

The Nth-to-default swap makes no payments on the 1, 2, …N-1 defaults nor on the N+1, N+2 defaults. Payments are only made on the Nth default, and then the swap terminates.

aianjie

 

15、Which of the following credit derivatives would hedge market-wide interest rate risk?

A) A TROR.

B) Credit spread put.

C) Credit spread swap.

D) Credit spread forward.

aianjie

 

The correct answer is A

In a total rate of return swap (TROR), the TROR receiver will pay the TROR payer if the reference obligation experiences a price decline that is greater than the coupon. The price decline could be due to an increase in credit risk or an increase in interest rates. Thus the TROR protects the TROR payer against interest rate risk. In the credit spread derivatives mentioned, the contracts’ values depend on a credit spread that is the difference between the reference obligation’s yield and a risk-free bond. The credit spread and the contracts’ values will thus be unaffected by changes in market-wide interest rates, all else equal.

aianjie

 

16、Which of the following CORRECTLY describes the total return receiver in a total return credit swap? The total return receiver will:

A) hedge credit exposure.

B) hedge interest rate risk.

C) diversify default risk.

D) increase credit exposure.

aianjie

 

 

The correct answer is D

A total return credit swap transfers all of the economic exposure of a reference asset or a basket of referenced assets to the total return receiver in the total return credit swap.

 

aianjie

 

17、The credit derivative that can hedge the most types of risk is most likely the:

A) basket default swap.

B) total return swap.

C) credit default option.

D) credit spread forward.

aianjie

 

 

The total return swap provides the protection buyer with a payoff for a decline in the value of the underlying regardless of the reason for the decline. A default or spread product specifies a particular condition that must occur. In the case of a credit default option being used to hedge a bond, for example, the spread could widen from macroeconomic factors, which would cause the bond’s value to decline. Since the decline was not caused by a default, however, the option would not provide a payoff.

aianjie

 

18、An investor can gain the exposure and return of an underlying loan by:

A) being the credit risk seller in a total return swap.

B) being the credit risk buyer in a total return swap.

C) entering into an interest-rate swap with a BB credit.

D) pledging compensating balances with the lender bank.

aianjie

 

The correct answer is B

The credit-risk seller pays to the credit-risk buyer the total return of the underlying instrument. An investor can gain the exposure and return by being the buyer in a total return swap.