A credit risk analyst is evaluating factors that quantify credit risk exposures. The risk that the borrower would fail to make full and timely repayments of its financial obligations over a given time horizon typically refers to:
A. Duration of default.
B. Exposure at default.
C. Loss given default.
D. Probability of default.
The pricing of credit default swaps is a function of all of the following EXCEPT:
A. Probability of default
B. Duration
C. Loss given default
D. Market spreads
An asset manager for a large mutual fund is considering forward exchange positions traded in a clearinghouse system and needs to mitigate the risks created as a result of this operation. Which of the following risks will be created as a result of the forward exchange transaction?
A. Exchange rate risk
B. Exchange rate and interest rate risk
C. Credit risk
D. Exchange rate and credit risk
A corporate bond gives a yield of 6%. A same maturity government bond yields 2%. The probability of the corporate bond defaulting is 2.5%. In case of default, investors expect to lose 60% of their investment. The risk premium in the credit spread is:
A. 1.5%
B. 4.5%
C. 2.5%
D. 0.5%
Alpha Bank estimates its 1-month, 95% VaR is 30 million EUR. This means that in the next month, there is a
A. 95% chance that AlphaBank can lose more than 30 million EUR.
B. 95% chance that AlphaBank will lose exactly 30 million EUR.
C. 95% chance that AlphaBank can lose at most 30 million EUR.
D. 95% chance that AlphaBank will at least lose 30 million EUR.
Which one of the following statements describes Macauley's duration?
A. The change in value of a bond when yields increase by 1 basis point.
B. The weighted average life of the bond payments.
C. The present value of the future cash flows of a bond calculated at a yield equal to 1%.
D. The percentage change in a bond price when the yields change by 1%.
Sam has hedged a portfolio of bonds against a small parallel shift in the yield curve using the duration measure. What should Sam do to ensure that the portfolio is hedged against larger parallel shifts in the yield curve?
A. Take positions to reduce the duration
B. Take positions to increase the duration
C. Take positions to make the convexity zero
D. Since the portfolio is duration hedged Sam does not need to take additional positions.
Which one of the following four factors typically drives the pricing of wholesale products?
A. Marketing considerations
B. Prevailing market price
C. Long-term competitiveness
D. Overall risk exposure
Which of the following are typical properties of a statistical distribution of potential losses that a bank might sustain over a period of time?
I. The range of possible losses above the average loss is much greater than those below the average loss.
II. The loss that is most likely to occur is below the average loss.
III.
The loss that is most likely to occur is above the average loss.
A.
II
B.
I, II
C.
I, III
D.
III
Using a forward transaction, Omega Bank buys 100 metric tones of aluminum for delivery in six-months' time. However, after two months, the bank becomes concerned with the potential fluctuations in aluminum prices and wants to hedge its potential exposure against a possible decline in aluminum prices. Which one of the following four strategies could the bank use to offset the risk from its current exposure to aluminum as it sets the price for selling the commodity in four-months' time?
A. Sell an aluminum futures contract
B. Buy an aluminum futures contract
C. Sell an aluminum forward contract
D. Buy an aluminum forward contract