Imagine that parties W, X, Y, and Z enter into CDS contract on the reference entity A. The figurebelow summarizes bilateral CDS agreements (e.g., W buys protection from X, and makesperiodic payments to X).Let's assume the reference entity A is in default. In addition, Y is also in default. In such a case,which of the following entities would not be affected by the counterparty risk?WXO Y○ NoneProtection Buyer on AWXProtection Seller on ANProtectionSeller on AProtectionBuyer on AProtection Buyer on AYProtection Seller on A

Option (a) W: This option is incorrect because W is not isolated from the risk of default. W buys…

Answered: Imagine that parties W, X, Y, and Z…

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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5. Which of the following is incorrect regarding establishing central counterparties (CCPs)? (a) CCPs allow netting of contracts. (b) CCPs can not be applied to OTC trades. (c) CCPs can create more transparency in trading. (d) CCPs mitigate counterparty risk in the financial system. 6. Which one of the following statements is incorrect regarding the margining of exchange-traded futures contracts? (a) If an investor fails to deposit variation margin in a timely manner, the positions may be liquidated by the carrying broker. (b) Initial margin is the amount of money that must be deposited when a futures contract is opened. (c) A margin call will be issued if the investor's margin account balance drops below the mainte- nance level. (d) A margin call will be issued only if the investor's margin account becomes negative
Credit risk has traditionally been a feature of OTC derivatives markets. Consider two companies, Aand B, that have entered into a number of derivatives transactions. If A defaults whenthe net value of the outstanding transactions to B is positive, a loss is likely to be takenby B. Similarly, if B defaults when the net value of outstanding transactions to A is positive, a loss is likely to be taken by company A How should this be understood, i dont understand how a positive value will give rise to a loss for the other company
A futures contract a. is not traded on an organized exchange and is customized to meet the needs of the parties. b. is not traded on an organized exchange and is subject to formal regulations which results in standardized contrasts. c. is traded on an organized exchange and is subject to formal regulations which results in standardized contrasts. d. is traded on an organized exchange and is customized to meet the needs of the parties.
Which of the following statements about interest rate swaps is/are true? I - The notional principals are exchanged by the counterparties at the end of an interest rate swap's life II - The differences in how credit risk is priced gives rise to comparative advantage in borrowing through swaps. III - When an intermediary is involved in a swap, the intermediary assumes no counterparty risk for either end of the transaction IV - It is possible for both counterparties to benefit from a swap even if one counterparty has the absolute advantage in all types of borrowing O a. I, II, III, and IV O b. II and IV O c. II, III, and IV O d. I, II, and IV Oe. II and III
Which one of the following is true about a firm commitment? Select one: a. A firm commitment is a contract that allows both the buyer or seller an option to engage (or not) in a long-term transaction. b. A firm commitment is a transaction that has already occurred and the commitment to pay or receive payment is pending. c. A firm commitment occurs as a result of a historical relationship and there is an expected commitment to engage in a transaction in the future. d. A firm commitment is an agreement with legally enforceable terms
24
Why might a company prefer a foreign currency option rather than a forward contract in hedging a foreign currency firm commitment? Why might a company prefer a forward contract over an option in hedging a foreign currency asset or liability?
Not all credit risk can be removed with a credit default swap because counterparty risk still exists interest rate risk still exists swaps are not traded on an exchange all of the above
Forward contracts are: Answer a. Contracts usually involving the exchange of a commodity or financial instrument. b. Easily resold c. Always standardized d. An agreement between more than two parties
Assume you are lending money to company X. A credit default swap (CDS) consists of an agreement by a third party to pay the lost principal and interest of a loan to you (the CDS buyer) if a borrower defaults on a loan. Which of the following is false? O A. A Swap completely solves the problem that company X might default OB. A Swap solves the default problem from Company X on the condition that the third party (CDS provider) will not default. O C. When financial crisis happens, the CDS seller may have to pay recovery to many CDS buyers, and then the CDS seller could default. O D. B and C are part of the reasons for 2008 Global financial crisis.
Hello Can you help with the explanation with this
The market flex provision in an underwriting/syndication agreement means that the underwriter/lead syndicator has the right to cancel the loan agreement. True False

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