Imagine that parties W, X, Y, and Z enter into CDS contract on the reference entity A. The figure below summarizes bilateral CDS agreements (e.g., W buys protection from X, and makes periodic payments to X). Let's assume the reference entity A is in default. In addition, Y is also in default. In such a case, which of the following entities would not be affected by the counterparty risk? W X O Y ○ None Protection Buyer on A W X Protection Seller on A N Protection Seller on A Protection Buyer on A Protection Buyer on A Y Protection Seller on A

The advantage of over-the-counter products such as swaps or forwards contracts,relative to exchange-traded products such as options or futures, is: *       A. standardization       B. regulation       C. flexibility.       D. all of the given answers

If the value of contractual transactions is affected by exchange rate fluctuations, most likely the firm has the ______ exposure. A. economic B. country risk C. transaction D. translation

A firm gives all its employees American-style call options on the firm's stock. The options have a five- year life. The employees are not allowed to sell their options, but they can take long and short positions in the company's shares. As a result, if an employee does exercise his/her options, then he/she can sell the shares that they acquire. Which of the following statements is correct? O Highly risk-averse investors are better off exercising a fraction of their options early and holding a portfolio containing the remaining options and the shares obtained by exercising. O If the firm will not pay any dividends during the next five years, then an employee considering exercising prior to maturity will always be better off by undertaking trades in the firm's stock and borrowing or lending. O Options are more volatile than the underlying stock. Thus, if the options are in-the-money, employees with high risk aversion will be better off exercising their options, O If an employee believes…

A swap contract Select one: A. relates to the trading of an asset owned by one company for another owned by a second company. B. is an arrangement between two or more parties to exchange future cash flows. C. can be used to increase or decrease the ratio of fixed and variable interest costs in its cost structure. D. Both B and C are true.

Counterparty credit risk is a function of the probability of default, exposure at default, and loss given default. Assuming that the individual exposure at default with a counterparty is fixed, which of the following statements is correct?   A. The probability of default can be mitigated by collateral, and exposure at default can be mitigated by netting.   B. The probability of default can be mitigated by netting, and exposure at default can be mitigated by collateral.   C. Loss given default can be mitigated by collateral, and exposure at default can be mitigated by netting.   D. Loss given default can be mitigated by netting, and exposure at default can be mitigated by collateral.

A foreign currency loan is a typical example for   O a. Currency Risk   O b. Interest rate risk   O c. Translation Exposure   O d. Transaction Exposure

All parties involved in a swap will benefit from the creation of a swap arrangement. a. True O b. False

Explain the relative merits of using an exchange-traded derivative contract versus using an over-the-counter derivative contract.

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