Credit Derivatives Mastery Quiz
Credit Derivatives Mastery Quiz
Test your knowledge on credit derivatives with this comprehensive quiz. Dive into the world of CDS, CDOs, and credit events, and see how well you understand these complex financial instruments.
Whether you’re a student, a finance professional, or just curious about credit derivatives, this quiz will challenge your understanding and expand your knowledge. Topics covered include:
- Credit Default Swaps
- Credit Linked Notes
- CDOs and Synthetic CDOs
- Market Dynamics and Risk Factors
To which family does the CDS belong to
Derivatives based on defaults
Derivative based on spread
Derivative replicating a full asset performance
Derivative based on return
Which are the payoffs in case of a credit event
Credit payoff
Phisical payoff
Cash Payoff
Fixed payout
In a credit link note you receive the money upfront and only return it in case of no credit event
True
False
A credit link note is a combination of
CDS+Stock
CDS+Spread
CDS+Bond
Bond+Spread
Bond+Stock
Insurance+Bond
An investor can buy protection for the underlying asset without owning it
True
False
Which of the following are credit events
Bankrupcy
Failure to pay
Paying back before maturity
Refusing to pay
Reduction of coupon/notional
A put on bond spread is ITM (in the money)
Credit quality is deteriorating
Credit quality is improving
A call on bond spread is ITM (in the money)
Credit quality is deteriorating
Credit quality is improving
In a total rate of return swap the protection buyer:
Receives Coupon+Var Market value and pays Libor+spread
Receives the Libor+Spread and pays Coupon+Var Market value
Is synthetically short on the asset
Is synthetically long on the asset
What are the risks of a CDS for a protection buyer
Cross default of underlying and protection seller
Risk of not receiving the protection fee
Additive risk effect
If the market has a lot of liquidity we observe
CDS Spread>Bond spread
CDS Spread<Bond spread
In a basket of default swaps with 20 assets, if we have a 1st to default order then
The higher the correlation the higher the probability of default
The lower the correlation the lower the probability of default
The higher the correlation the lower the probability of default
In a basket of default swaps with 20 assets, if we have the 20th to default order then
The lower the correlation the lower the probability of default
The higher the correlation the lower the probability of default
The lower the correlation the higher the probability of default
What's the difference between a cdo and a synthetic cdo
A cdo is backed by a pool of assets and a synthetic cdo by a pool of cds
A cdo is backed by a pool of cds and a synthetic cdo by a pool of assets
You have 100 CDS each valued at 1€ with a recovery rate of 40%. If after 1 year one defaults what will be the flows of payment between Protection buyer (PB) and protection seller (PS)
The PB pays 99.6*spread and PS pays 0.4
The PB pays 99.4*spread and PS pays 0.6
In a highly correlated basket of cdo's price is equal to
The cds with the lowest spread
The cds with the lowest price
The cds with the highest spread
If you are an investor you prefer
A highly correlated portfolio
A low correlated portfolio
Which is cheaper?
A correlated portfolio
An uncorrelated portfolio
The price of a highly correlated portfolio is equal to the highest spread
True
False
The price of an uncorrelated portfolio is equal to the sum of the spreads
True
False
A high spread signifies a high probability of default
True
False
In the case of first to default, a protection seller prefers
Uncorrelated basket
Correlated basket
In case of 20th to default a protection seller prefers
Uncorrelated basket
Correlated basket
The 3 factors that impact the price of the basket are
Correlation of Assets/Average or Sum of Risks/Spread Dispersion
Risk free rate/Average or Sum of Risks/Spread Dispersion
Risk free rate/Average or Sum of Risks/Standard deviation of the assets
What does the volatility smile imply
For a call we need to decrease the strike to compensate for the volatility and for the put we need to increase the strike to account for volatility
For a call we need to increase the strike to compensate for volatility and for the put we need to decrease the strike to account for volatility
The loss write function(Lt) gives us the maximum the protection buyer would pay given the % of default tranche
True
False
The higher the correlation of a basket the more probability we have of extreme events
True
False
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