Hull:Options,Futures,andOtherDerivatives,NinthEditionChapter25:CreditDerivativesMultipleChoiceTestBank:QuestionswithAnswers1.WhatisthenumberofcompaniesunderlyingtheCDXNAIGindex?A.50B.75C.100D.125Answer:DThereare125investmentgradecompaniesunderlyingCDXNAIG.2.WhatisthenumberofcompaniesunderlyingtheiTraxxindex?A.50B.75C.100D.125Answer:DThereare125investmentgradecompaniesunderlyingiTraxx.3.WhatistheratingofthecompaniesunderlyingtheiTraxxindex?A.AoraboveB.BBBoraboveC.BBorbelowD.BBBorbelowAnswer:BThecompaniesunderlyingiTraxxmustbeinvestmentgrade.ThismeansthattheircreditratingsmustbeBBBorabove.4.InaCDSwithanotionalprincipalof$100millionthereferenceentitydefaults.Whatisthepayofftothebuyerofprotectionwhentherecoveryrateis30%?A.$100millionB.$30millionC.$130millionD.$70millionAnswer:DThepayoffisthenotionalprincipaltimesoneminustherecovery.Inthiscasethisis100×(1−0.3)or$70million.5.Inaone-yearforwardcontractonaCDSthatwilllastfiveyears,whatusuallyhappensifthereisadefaultduringthefirstyear?A.ThereisapayofftotheforwardprotectionbuyeratthetimeofdefaultB.ThereisapayofftotheforwardprotectionbuyerattheendofoneyearC.ThereisapayofftotheforwardprotectionbuyerattheendofsixyearsD.ThecontractceasestoexistAnswer:DAforwardCDScontractceasestoexistifthereisadefaultbeforethematurityoftheforwardcontract.6.WhichofthefollowinghappenswhenthedefaultcorrelationofthecompaniesunderlyingaCDOincreases?A.ThevalueoftheseniortrancheandtheequitytranchetotheprotectionbuyerbothincreaseB.ThevalueoftheseniortrancheandtheequitytranchetotheprotectionbuyerbothdecreaseC.ThevalueoftheseniortranchetotheprotectionbuyerdecreasesandthevalueoftheequitytranchetotheprotectionbuyerincreasesD.ThevalueoftheseniortranchetotheprotectionbuyerincreasesandthevalueoftheequitytranchetotheprotectionbuyerdecreasesAnswer:DSeniortranchesaremorelikelytoexperiencelossesandsotheirvaluetotheprotectionbuyerincreases.Theequitytrancheislesslikelytoexperiencelossesandsoitsvaluetotheprotectionbuyerdecreases.(Thetotalexpectedlossofalltranchesst...
