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QUESTION 1 Which of the following best describes a total return swap? a
QUESTION 1
- Which of the following best describes a total return swap?
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a. |
It exchanges the realized return on an asset, including both income and capital gains/losses, for a return, equal to LIBOR plus a spread on the initial value of the asset. |
| b. |
It exchanges the promised return on an asset, including both income and capital gains/losses, for a return equal to LIBOR plus a spread on the initial value of the asset. |
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c. |
It exchanges the realized return on an asset, including income but not capital gains/losses, for a return equal to LIBOR plus a spread on the initial value of the asset. |
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d. |
It exchanges the promised return on an asset, including income but not capital gains/losses, for a return equal to LIBOR plus a spread on the initial value of the asset. |
10 points
QUESTION 2
- A CDS with a number of reference entities provides for each reference entity a payoff if it defaults. What is a name for this CDS?
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a. |
Binary CDS |
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b. |
Add-up Basket CDS |
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c. |
First-to-Default CDS |
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d. |
n-to-Default CDS |
10 points
QUESTION 3
- What is the number of companies underlying the iTraxx index?
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a. |
50 |
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b. |
75 |
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c. |
100 |
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d. |
125 |
10 points
QUESTION 4
- For what range of losses is the equity tranche of iTraxx (or CDX NA IG) responsible?
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a. |
0 to 10% |
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b. |
0 to 7% |
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c. |
0 to 6% |
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d. |
0 to 3% |
10 points
QUESTION 5
- A portfolio of ten companies is formed. In a third-to-default swap
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a. |
There is a payoff when the third default on the portfolio happens. |
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b. |
There is a payoff when the first, second and third companies defaults happen. |
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c. |
There is a payoff when the third, fourth, fifth…tenth companies defaults happen. |
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d. |
None of the above |
10 points
QUESTION 6
- Which of the following is the most popular life for a credit default swap?
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a. |
1 year |
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b. |
3 years |
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c. |
5 years |
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d. |
10 years |
10 points
QUESTION 7
- In a one-year forward contract on a CDS that will last five years, what usually happens if there is a default during the first year?
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a. |
There is a payoff to the forward protection buyer at the time of default. |
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b. |
There is a payoff to the forward protection buyer at the end of one year. |
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c. |
There is a payoff to the forward protection buyer at the end of six years. |
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d. |
The contract ceases to exist. |
10 points
QUESTION 8
- If the CDS-bond basis is X minus Y, what are X and Y?
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a. |
X is the CDS spread and Y is the excess of the bond yield over the swap rate. |
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b. |
X is the excess of the bond yield over the swap rate and Y is the CDS spread. |
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c. |
X is the CDS spread and Y is the excess of the bond yield over the Treasury rate. |
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d. |
X is the excess of the bond yield over the Treasury rate and Y is the CDS spread. |
10 points
QUESTION 9
- Which of the following describes "base correlation"?
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a. |
The most basic correlation measure possible |
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b. |
A correlation used to value all tranches |
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c. |
The correlation implied from market data |
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d. |
The correlation for valuing a tranche with an attachment point of 0% |
10 points
QUESTION 10
- In the Lehman bankruptcy the payoff to people who had bought CDS protection was 91.375% of the notional principal. How was this determined?
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a. |
By calculation of the cheapest-to-deliver bond |
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b. |
By an auction process |
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c. |
By a calculation agent |
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d. |
By Lehman's liquidators |
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