A trader needs to estimate the CVA on a swap. The exposure management group comes up with EPE of $6 million. With the collateral, the recovery rate of the firm is 60%. The discount factor is 0.9. The probability of default (PD) of the counterparty is 2%. The management group funds that the collateral's PD is positively associated with the PD of the counterparty. EE considering this association is $7 million. What is risk the association referring to and what is the CVA considering this risk? A. Wong-way Risk; 0.0504 m B. Right-way Risk; 0.0504 m C. Wrong-way Risk; 0.0432 m D. Right-way Risk; 0.0432 m

A trader needs to estimate the CVA on a swap. The exposure management group comes up with EPE of $6 million. With the collateral, the recovery rate of the firm is 60%. The discount factor is 0.9. The probability of default (PD) of the counterparty is 2%. The management group funds that the collateral's PD is positively associated with the PD of the counterparty. EE considering this association is $7 million. What is risk the association referring to and what is the CVA considering this risk? A. Wong-way Risk; 0.0504 m B. Right-way Risk; 0.0504 m C. Wrong-way Risk; 0.0432 m D. Right-way Risk; 0.0432 m

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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The return on loan 1 is R1 = 6.25%, the risk on loan 2 is \sigma 2 = 1.8233 %, and the return of the portfolio is Rp = 4.555 % . Calculate of the loss given default on loans 1 and 2, the proportions of loans 1 and 2 in the portfolio, and the risk of the portfolio, \sigma p, using Moody's Analytics Portfolio Manager.Suppose that an Fl holds two loans with the following characteristics.
Suppose that an FI holds two loans with the following characteristics. Annual Spread Between Loss to FI Expected Loan Rate and FI=s Annual Given Default Loan Xi Cost of Funds Fees Default Frequency 1 .6 4.5% 2.5% 30% 3% ρ12 = -.4 2 .4 3.5% 2% 20% 5% Calculate of the return and risk on the two-asset portfolio using KMV Portfolio Manager.
13. Suppose that an FI holds two loans with the following characteristics. Annual Spread between Loan Rate and FI's Cost of Funds Loan X₁ 0.45 0.55 1 2 5.5% 3.5 Annual Fees 2.25% 1.75 Loss to Fl Expected Given Default Default Frequency 30% 20 3.5% 1.0 P12 = -0.15 Calculate the return and risk on the two-asset portfolio using Moody's Analytics Portfolio Manager.
Risk-free rate is 7%, expected return on the market portfolio is 12%. Identify the correct equation for Security Market Line (SML): a. r = 5% + b(7%) b. r = 7% + b (12%) c. r = 7% + b (5%) d. r = 5% + b (12%)
Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to pay returns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standard deviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also has standard deviation equal to 20% and has correlationof 0.5 with the S&P500. Determine whether asset A and B are overvalued or undervalued, and explain why
Calculate a security's default risk premium, given an equilibrium rate of return of 8 percent, an inflation risk premium of 3.35 percent, a real risk-free rate is 2.2 percent, a liquidity risk premium is 0.55 percent, and a maturity risk premium is 0.85 percent with no special covenants.
With the assistance of an annotated graph, explain when a security is overpriced, under-priced or fairly priced according to the Capital Asset Pricing Model., when the calculated expected rate of return of a security is 12.2% and the actual expected rate of return on a security is 10%.
The risk-free rate is 7% and the expected rate of return on the market portfolio is 11%. a. Calculate the required rate of return on a security with a beta of 1.92. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. b. If the security is expected to return 15%, is it overpriced or underpriced? a. Required return b. If the security is expected to return 16%, is it overpriced or underpriced? %
The market risk premium (E[Rm]-Rf) is 6%. The risk-free rate (Rf ) is 2%. Asset X has beta equal to 0.8 and expected return equal to 7%. Asset Y has beta equal to 1 and expected return equal to 7.5%. What level of abnormal return can be expected from a 1:1 long-short portfolio of X and Y? a. 0.7% b. 0.6% c. 0.5% d. 0.4% e. None of the above
d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to pay returns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standard deviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also has standard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whether asset A and B are overvalued or undervalued, and explain why. (Hint: Beta of asset i (B¡) = "PIM , where ơị,ɑm are standard deviations of asset i and market OM portfolio, Pim is the correlation between asset i and the market portfolio)
1. Given the following summary statistics, Mean S.D. 1.235 0.997 Asset A 0.52 Asset B. 0.44 (a) If the correlation between the two financial series is 0.25. What are the optimal portfolio weights to minimize risk? (b) What are the expected return and standard deviation of the optimal port- folio? (c) Compute the 1% Value-at-Risk for the next 5 days (d) Compute the expected shortfall
A risk manager uses a futures contract, which has a correlation of 0.88 with the spot asset, to hedge her exposure. She calculates a hedge ratio of 0.9429. What part of the cash flow remains unhedged? None of these O 5.71% O 77.44% 22.56%

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