A credit associate extending a loan to an obligor suspects that the obligor may change his behavior after the loan has been originated. The obligor in this case may use the loan proceeds for purposes not sanctioned by the lender, thereby increasing the risk of default. Hence, the credit associate must estimate the probability of default based on the assumptions about the applicability of the following tendency to this lending situation:
A. Speculation
B. Short bias
C. Moral hazard
D. Adverse selection
Which one of the following statements correctly identifies risks in foreign exchange forwards?
A. Short-term forward price fluctuations are driven by changes in the spot exchange rate, since most inter-country interest rates differentials are significant, and the effect of compounding is large for short periods of time.
B. Short-term forward price fluctuations are driven by changes in the spot exchange rate, since most inter-country interest rates differentials are small, and the effect of compounding is small for short periods of time.
C. Long-term forward price fluctuations are driven by changes in the spot exchange rate, since most inter-country interest rates differentials are small, and the effect of compounding is large for short periods of time.
D. Long-term forward price fluctuations are driven by changes in the spot exchange rate, since most inter-country interest rates differentials are significant, and the effect of compounding is small for short periods of time.
Which of the following risk types are historically associated with credit derivatives?
I. Documentation risk
II. Definition of credit events
III. Occurrence of credit events
IV.
Enterprise risk
A.
I, IV
B.
I, II
C.
I, II, III
D.
II, III, IV
Alpha Bank determined that Delta Industrial Machinery Corporation has 2% change of default on a one-year no-payment of USD $1 million, including interest and principal repayment. The bank charges 3% interest rate spread to firms in the machinery industry, and the risk-free interest rate is 6%. Alpha Bank receives both interest and principal payments once at the end the year. Delta can only default at the end of the year. If Delta defaults, the bank expects to lose 50% of its promised payment.
What may happen to the Delta's initial credit parameter and the value of its loan if the machinery industry experiences adverse structural changes?
A. Probability of default and loss at default may decrease simultaneously, while duration rises causing the
loan value to decrease.
B. Probability of default and loss at default may decrease simultaneously, while duration falls causing the loan value to decrease.
C. Probability of default and loss at default may increase simultaneously, while duration rises causing the loan value to decrease.
D. Probability of default and loss at default may increase simultaneously, while duration falls causing the loan value to decrease.
In the United States, foreign exchange derivative transactions typically occur between
A. A few large internationally active banks, where the risks become concentrated.
B. All banks with international branches, where the risks become widely distributed based on trading exposures.
C. Regional banks with international operations, where the risks depend on the specific derivative transactions.
D. Thrifts and large commercial banks, where the risks become isolated.
Which one of the following four options does NOT represent a benefit of compensating balances to the bank?
A. Compensating balances allow the bank to net some of the exposure they may have in case of default, by taking funds from these specific deposit account one the borrower defaults.
B. Since the compensating balances cannot be withdrawn at short notice, if at all, they are not considered transaction accounts and are able to provide a stable funding to the bank, reducing its reliance on more volatile external inter-bank based funding sources.
C. Compensation balances influence the expected loss rate of the bank given the default obligor and improve capital structure by controlling obligor type and avoiding payment delays.
D. Since the compensating balances reduce the next amount lent to the borrower, the earned return on the loan is increased, further widening the bank's interest rate margin and profitability.
Which one of the following four statements correctly describes an American call option?
A. An American call option gives the buyer of that call option the right to buy the underlying instrument on any date up to and including the expiry date.
B. An American call option gives the buyer of that call option the right to sell the underlying instrument on any date up to and including the expiry date.
C. An American call option gives the buyer of that call option the right to buy the underlying instrument on the expiry date.
D. An American call option gives the buyer of that call option the right to sell the underlying instrument on the expiry date.
A risk manager has a long forward position of USD 1 million but the option portfolio decreases JPY 0.50 for every JPY 1 increase in his forward position. At first approximation, what is the overall result of the options positions?
A. The options positions hedge the forward position by 25%.
B. The option positions hedge the forward position by 50%.
C. The option positions hedge the forward position by 75%.
D. The option positions hedge the forward position by 100%.
Which one of the following changes would typically increase the price of a fixed income instrument, such as a bond?
A. Decrease in inflation rates in a country.
B. Increase in time to maturity.
C. Increase in risk premium.
D. Increase in demand for goods and services.
A financial analyst is trying to distinguish credit risk from market risk. A $100 loan collateralized with $200 in stock has limited ___, but an uncollateralized obligation issued by a large bank to pay an amount linked to the long-term performance of the Nikkei 225 Index that measures the performance of the leading Japanese stocks on the Tokyo Stock Exchange likely has more ___ than ___.
A. Legal risk; market risk; credit risk
B. Market risk; market risk; credit risk
C. Market risk; credit risk; market risk
D. Credit risk, legal risk; market risk
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