Risk Latte - Quiz#3

a) a binomial tree implementation of the LMM model;
b) a Monte Carlo implementation of the LMM model;
c) a Monte Carlo implementation of the Hull-White model;
d) a binomial tree implementation of the Hull-White model.

3) The relationship between total rate of return swaps (TROR) and a Repo can be expressed

a) Repo = Paying in a TROR + Sale of a Bond
b) Repo = Paying in a TROR + Purchase of a Bond
c) Repo = Receiving in a TROR + Purchase of a Bond
d) Reop = Receiving in a TROR + Sale of a Bond

4) The probability of default in the original Merton model can be derived via:

a) a call option;
b) a call and a put option;
c) two put options and a call option
d) a put option

5) A credit spread put hedges:

a) A long position in an asset with respect to credit deterioration risk only;
b) A long position in an asset with respect to credit deterioration as well as default risk;
c) A short position in an asset with respect ot credit deterioration as well as default risk;
d) A short position in an asset with credit deterioration risk only.

6) In a first passage time model of default suggested by Black and Cox(1976):

a) there is an endogenous logit default boundary;
b) there is an endogenous lognormal default boundary;
c) there is an exogenous exponential default boundary;
d) there is an exogenous lognormal default boundary;

7) A credit card company wants to protect against rising bankruptcy filings but at the same time wants to maintain the advantage of decreasing bankruptcy filings. Most of credit card company's receivables are in US Dollars. The mostly likely trade for the company would be to:

a) to buy put options on QBI futures contract that trade on CME;
b) to buy call options on QBI futures contract that trade on CME;
c) to sell call options on QBI futures contract that trade on CME;
d) to buy a combination of call and put options on QBI futures.

8) The same credit card company (as in question No. 7) is expecting its bad debts to be around US$150,000 in the next three months. It wants a hedge against this amount, without having to securitize any assets. It therefore decides to hedge using QBI futures that trade on the CME. It is April and the next settlement of the futures would be in July. The QBI futures are in the units of 1,000 and the settlement price is always rounded to the next 25. The company decides to buy calls on QBI with a strike of 350; the premium of one option contract is $0.35 and the credit card company buys 10 call options on the QBI futures with a strike of 350. upon maturity the QBI futures contract stand at 375,144. Thus.

a) the payoff from the options will be enough to offset the bad debts;
b) the payoff from the options is not enough to offset the bad debts;
c) the payoff from the options is zero;
d) the payoff from the options cannot be calculated from the above data.

9) The payoff of the 10 call options in the previous question(question No. 8) is:

a) $95,000
b) $148,000
c) 0
d) Cannot be determined.

10) In the CSFP's Risk plus model the probability of defaults is assumed to follow:

a) Gamma distribution;
b) Negative binomial distribution;
c) Poisson distribution;
d) Pareto-Levy distribution.

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