Credit Risk Exam 16 April 2016

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1. We sold 5m CDS 5y @ 238. The next day the CDS quotes 250. What's the Pnl on the trade?

Explanation

The Pnl on the trade is calculated by subtracting the initial CDS quote (238) from the next day's CDS quote (250) and multiplying it by the quantity of CDS sold (5m). Therefore, the Pnl on the trade is (250 - 238) * 5m = 26400.

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About This Quiz
Credit Risk Exam 16 April 2016 - Quiz

This Credit Risk Exam from 16 April 2016 assesses understanding of investment grade ratings, economic impacts on credit curves, derivative strategies, bond seniority, CDO pricing, and correlation effects in bond portfolios. It is crucial for professionals in finance and risk management.

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2. What right does a shareholder have?

Explanation

A shareholder has the right to receive dividends, which are a portion of the company's profits distributed to shareholders. Dividends are typically paid out on a regular basis, such as quarterly or annually, and are based on the number of shares owned by the shareholder. This right allows shareholders to benefit financially from their investment in the company and share in its success.

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3. If you trade a CDS on BNP with JPMorgan, on which company do you have Counterparty risk?

Explanation

When trading a CDS (Credit Default Swap) on BNP (BNP Paribas) with JPMorgan, the counterparty risk refers to the risk that the other party involved, in this case, JPMorgan, may default on its obligations. Therefore, if you have a CDS on BNP with JPMorgan, the counterparty risk would be associated with JPMorgan.

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4. How many different bonds are required to calculate Semi annual default probabilities over 3 years?

Explanation

To calculate semi-annual default probabilities over 3 years, we need to consider each bond as a separate entity. Since the question asks for the number of different bonds required, the answer is 6. This implies that there are 6 distinct bonds that need to be taken into account in order to calculate the semi-annual default probabilities over the given time period.

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5. If you trade a CDS on BNP with JPMorgan, on which company do you have Credit risk?

Explanation

When trading a Credit Default Swap (CDS) on BNP with JPMorgan, the credit risk lies with BNP. This means that if BNP were to default on its debt obligations, the buyer of the CDS (JPMorgan) would be entitled to compensation from BNP. The CDS acts as a form of insurance, protecting the buyer against the credit risk of the reference entity (BNP in this case). Therefore, in this scenario, the credit risk is associated with BNP.

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6. We enter into a 5m long/short between VW and Benz. The 5Y VW CDS quotes 160bps, 5Y Benz 90.What's the expected profit on the strategy?

Explanation

The expected profit on the strategy is 154,000. This can be calculated by taking the difference between the CDS quotes for VW and Benz (160bps - 90bps = 70bps), and multiplying it by the length of the position (5m). Therefore, the expected profit is 70bps * 5m = 350bps, which is equal to 154,000.

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7. A CDS 5Y quotes 150bps. A investor wants to buy 5m of this CDS but pay the fee upfront, on trade date. What would you say is a fair price for the upfront fee?

Explanation

The fair price for the upfront fee is 330000. This is determined by multiplying the notional amount of 5m by the quoted spread of 150bps (1.5%). The result is 75000, which represents the annual fee. Since the investor wants to pay the fee upfront, the fair price is calculated by discounting the annual fee over the 5-year period, resulting in 330000.

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8. A portfolio is made of 10 bonds. Each CDS on the bonds trade at 450bps. Correlation between the bonds is at 0.What's the probability to have 2 defaults within a year?

Explanation

The probability of having 2 defaults within a year can be calculated using the formula for the probability of independent events. Since the correlation between the bonds is 0, it implies that the defaults of the bonds are independent events. Therefore, the probability of having 2 defaults within a year can be calculated as the product of the individual probabilities of default for each bond. Since each CDS trades at 450bps, the probability of default for each bond is 4.5%. Thus, the probability of having 2 defaults within a year is (0.045)^2 = 0.002025, which is equivalent to 0.2025%.

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9. If a CDS quotes 225bps, can you estimate the Default Probability of the underlying name?

Explanation

The correct answer is 375, 3.75%. The CDS quote of 225bps indicates the spread over the risk-free rate that investors demand to hold the CDS. By comparing this spread to historical data or market benchmarks, we can estimate the default probability of the underlying name. In this case, a CDS quote of 225bps suggests a default probability of 3.75% (225bps divided by 10000bps).

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10. Are Bonds quoted:

Explanation

Bonds are quoted as clean, meaning that the quoted price does not include any accrued interest or other costs. The clean price reflects only the principal value of the bond. On the other hand, dirty price includes the accrued interest that has accumulated since the last interest payment. This distinction is important for investors who need to accurately calculate the total cost of purchasing a bond.

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11. Which bond has the lowest seniority?

Explanation

Convertible bonds have the lowest seniority compared to senior, subordinated, and equity bonds. Convertible bonds give the bondholder the option to convert the bond into a predetermined number of common stock shares. This means that in the event of bankruptcy or liquidation, convertible bondholders have a lower claim on the company's assets compared to senior and subordinated bondholders. Equity holders also have a higher claim on the company's assets compared to convertible bondholders. Therefore, convertible bonds have the lowest seniority.

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12. A 5Y corporate CDS quotes 180bps, what's the survival probability implied by this level over 5 years?

Explanation

The survival probability implied by a 5Y corporate CDS quote of 180bps is 85.87% or 0.8587. This means that there is an 85.87% chance that the corporate entity will not default on its debt over the next 5 years. The CDS quote of 180bps represents the cost of insuring against default, and a lower cost implies a higher survival probability.

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13. The table is the Annual transition rates. If you hold a BB bond, what is the probability your bond will default next year?

Explanation

The correct answer is 1.29%. According to the given information, the table represents the annual transition rates. If you hold a BB bond, the probability that your bond will default next year is 1.29%.

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14. What is Rating the limit for Investment Grade?

Explanation

The rating limit for investment grade is BBB for Standard & Poor's and Fitch, and bbb for Moody's. The minus sign (-) indicates a slightly lower rating within the investment grade category. Therefore, BBB-, bbb-, BBB-, and bbb- are all within the investment grade range.

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We sold 5m CDS 5y @ 238. The next day the CDS quotes 250. What's...
What right does a shareholder have?
If you trade a CDS on BNP with JPMorgan, on which company do you have...
How many different bonds are required to calculate Semi annual default...
If you trade a CDS on BNP with JPMorgan, on which company do you have...
We enter into a 5m long/short between VW and Benz. The 5Y VW CDS...
A CDS 5Y quotes 150bps. A investor wants to buy 5m of this CDS but pay...
A portfolio is made of 10 bonds. Each CDS on the bonds trade at...
If a CDS quotes 225bps, can you estimate the Default Probability of...
Are Bonds quoted:
Which bond has the lowest seniority?
A 5Y corporate CDS quotes 180bps, what's the survival probability...
The table is the Annual transition rates. If you hold a BB bond,...
What is Rating the limit for Investment Grade?
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