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Homework answers / question archive / 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? a

Finance

QUESTION 1

  1. Which of the following best describes a total return swap?

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.

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.

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

  1. 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?

a.

Binary CDS

b.

Add-up Basket CDS

c.

First-to-Default CDS

d.

n-to-Default CDS

10 points   

QUESTION 3

  1. What is the number of companies underlying the iTraxx index?

a.

50

b.

75

c.

100

d.

125

10 points   

QUESTION 4

  1. For what range of losses is the equity tranche of iTraxx (or CDX NA IG) responsible?

a.

0 to 10%

b.

0 to 7%

c.

0 to 6%

d.

0 to 3%

10 points   

QUESTION 5

  1. A portfolio of ten companies is formed. In a third-to-default swap

a.

There is a payoff when the third default on the portfolio happens.

b.

There is a payoff when the first, second and third companies defaults happen.

c.

There is a payoff when the third, fourth, fifth…tenth companies defaults happen.

d.

None of the above

10 points   

QUESTION 6

  1. Which of the following is the most popular life for a credit default swap?

a.

1 year

b.

3 years

c.

5 years

d.

10 years

10 points   

QUESTION 7

  1. 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?

a.

There is a payoff to the forward protection buyer at the time of default.

b.

There is a payoff to the forward protection buyer at the end of one year.

c.

There is a payoff to the forward protection buyer at the end of six years.

d.

The contract ceases to exist.

10 points   

QUESTION 8

  1. If the CDS-bond basis is X minus Y, what are X and Y?

a.

X is the CDS spread and Y is the excess of the bond yield over the swap rate.

b.

X is the excess of the bond yield over the swap rate and Y is the CDS spread.

c.

X is the CDS spread and Y is the excess of the bond yield over the Treasury rate.

d.

X is the excess of the bond yield over the Treasury rate and Y is the CDS spread.

10 points   

QUESTION 9

  1. Which of the following describes "base correlation"?

a.

The most basic correlation measure possible

b.

A correlation used to value all tranches

c.

The correlation implied from market data

d.

The correlation for valuing a tranche with an attachment point of 0%

10 points   

QUESTION 10

  1. In the Lehman bankruptcy the payoff to people who had bought CDS protection was 91.375% of the notional principal. How was this determined?

a.

By calculation of the cheapest-to-deliver bond

b.

By an auction process

c.

By a calculation agent

d.

By Lehman's liquidators

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