Deck 9: Xvas

Question 1

Prior to the credit crisis that started in 2007 which of the following was used by derivatives traders for the discount rate when derivatives were valued

A) The Treasury rate
B) The LIBOR rate
C) The repo rate
D) The overnight indexed swap rate

Answer 1

B
Derivatives markets used LIBOR as the discount rate pre-crisis.

Question 2

A bank has three uncollateralized transactions with a counterparty worth +$10 million,−$20 million and +$25 million.A netting agreement is in place.What is the maximum loss if the counterparty defaults today.

A) $15 million
B) $35 million
C) $20 million
D) Zero

Answer 2

A
The netting agreement means that the three transactions are considered to be a single transaction.The net value of the transactions to the bank is 10−20+25 or $15 million.This is the maximum amount that could be lost if the counterparty defaults today.

Question 3

DVA for a bank is most dependent on

A) The default probabilities of the bank in future time periods
B) The default probabilities of the bank's counterparties in future times periods
C) Both A and B
D) Neither A nor B

Answer 3

A
DVA is the cost to the counterparty (benefit to the bank)arising from the possibility of a default by the bank.It is the bank's default probabilities that are relevant

Question 4

CVA stands for

A) Collateral valuation adjustment
B) Credit valuation adjustment
C) Credit valuation agreement
D) Collateral valuation agreement

Question 5

DVA stands for

A) Debt valuation adjustment
B) Debt valuation agreement
C) Debt variation adjustment
D) Debit valuation agreement

Question 6

Which of the following involves most credit risk

A) Exchange trading
B) OTC trading with a central clearing party being used
C) OTC trading with bilateral clearing and collateral being posted
D) OTC trading with bilateral clearing and no collateral being posted

Question 7

It is assumed that a company can default after one year or after two years.The probability of default at each time is 1.5%.The present value of the expected loss to a bank on a derivatives portfolio if the company defaults after one year is estimated to be $1 million.The present value of the expected loss if it defaults after two years is estimated to be $2 million.Which of the following is the bank's CVA ?

A) $3,000,000
B) $300,000
C) $45,000
D) $150,000

Question 8

KVA is concerned with

A) The cost of funding initial margin
B) The cost of funding variation margin
C) The cost of regulatory capital
D) None of the above

Question 9

Since the credit crisis that started in 2007 which of the following have derivatives traders used as the risk-free discount rate for collateralized transactions

A) The Treasury rate
B) The LIBOR rate
C) The repo rate
D) The overnight indexed swap rate

Question 10

Which of the following is NOT a valuation adjustment

A) CVA
B) MVA
C) ZVA
D) KVA

Question 11

Which of the following is true

A) FVA is always positive
B) FVA is always negative
C) FVA for a transaction is initially zero
D) None of the above

Question 12

Financial economics argues that as the percentage of equity in the capital structure increases

A) The required return on both equity and debt decrease
B) The required return on equity decreases and the required return on debt increases
C) The required return on equity increases and the required return on debt decreases
D) The required return on both equity and debt increase

Question 13

Which of the following is true

A) OIS rates are less than the corresponding LIBOR/swap rates
B) OIS rates are greater than corresponding LIBOR/swap rates
C) OIS rates are sometimes greater and sometimes less than LIBOR/swap rates
D) OIS rates are equivalent to one-day LIBOR rates

Question 14

CVA is concerned with

A) The cost of funding initial margin
B) The cost of funding variation margin
C) The cost of regulatory capital
D) None of the above

Question 15

FVA is concerned with

A) The cost of funding initial margin
B) The cost of funding variation margin
C) The cost of regulatory capital
D) None of the above

Question 16

MVA is concerned with

A) The cost of funding initial margin
B) The cost of funding variation margin
C) The cost of regulatory capital
D) None of the above

Question 17

Financial economics argues that

A) All investments by a company should earn the company's weighted average cost of capital
B) The required expected return on an investment is the average cost of debt
C) The required expected return on an investment increases with the riskiness of the investment
D) The required expected return on an investment decreases with the riskiness of the investment

Question 18

Which of the following is true

A) CVA and DVA can be calculated deal by deal
B) CVA and DVA must both be calculated for the whole portfolio a bank has with a counterparty
C) CVA can be calculated deal by deal but DVA must be calculated for a portfolio
D) DVA can be calculated deal by deal but CVA must be calculated for a portfolio

Question 19

Which of the following is approximately true

A) FVA can be calculated from the initial value of a derivative
B) FVA can be calculated on a transaction-by-transaction basis without considering the whole portfolio of derivatives a dealer has with a counterparty
C) FVA should theoretically depend on a dealer's funding cost
D) None of the above

Question 20

When a bank's borrowing rate goes up,which of the following is true

A) DVA increases so that the bank's profit goes down
B) DVA increases so that the bank's profit goes up
C) DVA declines so that the bank's profit goes down
D) DVA declines so that the bank's profit goes up