A credit rating analyst wants to determine the expected duration of the default time for a new three-year loan, which has a 2% likelihood of defaulting in the first year, a 3% likelihood of defaulting in the second year, and a 5% likelihood of defaulting the third year. What is the expected duration for this three-year loan?
A. 1.5 years
B. 2.1 years
C. 2.3 years
D. 3.7 years
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
Beta Insurance Company is only allowed to invest in investment grade bonds. To maximize the interest income, Beta Insurance Company should invest in bonds with which of the following ratings?
A. AAA
B. AA
C. A
D. B
Which of the following statements about parametric and nonparametric methods for calculating Value-atrisk is correct?
A. Parametric methods generally assume returns are normally distributed, and non-parametric methods make no assumptions about return distributions.
B. Parametric methods make no assumptions about return distributions, and non-parametric methods assume returns are normally distributed.
C. Both parametric and nonparametric methods assume returns are normally distributed.
D. Both parametric and nonparametric methods make no assumptions about return distributions.
Since most consumers of natural gas do not have the ability to store it, they contract with gas suppliers to receive a flow of natural gas equal to a specific number of MMBT's per day (MMBT is millions of British Termal Units, the unit in which gas futures are quoted on the U.S. markets). To protect against price increases with a bank, the natural gas consumer, concerned with the average price over the course of the month, will use the following contracts:
A. American options
B. Asian options
C. Compound options
D. Flexible volume options
Unico Bank, concerned with managing the risk of its trading strategies, wants to implement the trading strategy that exposes the bank to the lowest market risk. Which one of the following four strategies should Unico take to limit its risk exposure?
A. A matched book strategy that allows the trading desk to match all customer positions immediately with an equal and opposite position by trading internally or with another bank.
B. A covering strategy that manages positions in the product by executing covering deals or hedging deal at the discretion of the trading des.
C. A passive hedging strategy that allows the traders to price transactions with customers and other banks, at the relevant bid price on the market.
D. A market-maker strategy that allows the traders to quote a buy and sell price to customers and other banks and to trade at the relevant price on the sell side of the market.
To reduce the variability of net interest income, Gamma Bank can swap positions that make its duration gap equal to
A. 0
B. 1
C. -1
D. 0.5
According to the principles of the Basel II Accord, the implementation and relative weights of the elements of the operational risk framework depend on:
I. The culture of the financial institution
II. Regulatory drivers
III. Business drivers
IV.
The bank's reporting currency
A.
I, IV
B.
II, III
C.
II, IV
D.
I, II, III
The Treasury function of a bank typically manages all of the following components EXCEPT:
A. Bank's assets and liabilities
B. Bank's liquidity
C. Bank's capital
D. Bank's performance estimates
A hedge fund trader buys options to establish an exposure in the currency market, thereby effectively removing the risk of being able to participate in a gapping market. In this case the options premium represents the price paid for eliminating the execution risk of
A. The delta-hedging strategy.
B. The gamma-hedging strategy.
C. The vega-hedging strategy.
D. The theta-hedging strategy.
