DISCOVER EXAM 2

Which of the following is/are addressed by the FATF recommendations for combating money laundering and the funding of terrorism and proliferation? A. Customer due diligence B. Politically Exposed Persons C. Payment Netting

A & B Only

What is a marketable buy limit order? A buy limit order that specifies a price that is equal to or higher than the lowest sell limit price A buy limit order that specifies a price that is equal to or lower than the lowest sell limit price A buy limit order that specifies a price that is equal to or higher than the lowest buy limit price A buy limit order that specifies a price that is equal to or lower than the lowest buy limit price

A buy limit order that specifies a price that is equal to or higher than the lowest sell limit price

Which of the following is not usually a credit event for the entity in question? A sovereign government declares a moratorium on outstanding debt payments A company is forced into liquidation following an accounting scandal A company is downgraded by a credit rating agency

A company is downgraded by a credit rating agency

Which of the following is a type of operational risk? An increase in the number of defaults by a bank's corporate customers due to an economic downturn A fine imposed by a regulator due to the mis-selling of a product to a customer A change in market interest rates that affects the profitability of a bank's mortgage portfolio

A fine imposed by a regulator due to the mis-selling of a product to a customer

Which of the following describes a protection seller? A market participant that reduces credit risk by paying a periodic fee in exchange for receiving default protection A market participant that increases credit risk by receiving a periodic fee in exchange for offering default protection A credit rating agency that receives fees in exchange for determining the creditworthiness of a particular borrower; An investment bank that receives fixed rate in an asset swap and eliminates the interest rate risk of a corporate bond)

A market participant that increases credit risk by receiving a periodic fee in exchange for offering default protection

Exchanges create standardized contract specifications for which of the following? A. Futures B. Credit default swaps C. Stocks

A only

Which of the following statements is true in relation to exchanges? An exchange is a lightly-regulated market. A security can be delisted from an exchange if it does not satisfy continuing standards An exchange facilitates the listing but not the trading of securities.

A security can be delisted from an exchange if it does not satisfy continuing standards

Which of the following are elements of the client onboarding process? A. performing customer due diligence B. establishing the credit terms C. managing legal agreements

A, B, & C

Which of the following products create credit risk exposure? A.Mortgages B.Credit Cards C.Overdrafts D.Derivatives

A, B, C, and D

Which of the following situations are sources of credit risk? A. A seller allows a customer 60 days to pay for goods B. A customer places funds on deposit at a bank C. A buyer pays a service provider in advance D. A bank trader sells a stock that has declined in price on the New York Stock Exchange)

A, B, and C only

Which of the following is classified as a non-ferrous metal? Iron Ore Steel Aluminium PVC

Aluminium

Which of the following statements is true? An FRN pays a fixed coupon over its life The additional "margin" over the risk-free rate is known as credit premium An asset swap transforms a fixed rate instrument into a synthetic FRN.

An asset swap transforms a fixed rate instrument into a synthetic FRN.

Which of the following are traded commodities? A. Shares in a company that trades commodities B. Emission allowances C. Electricity D. Credit default swaps

B&C Only

Which of the following is/are challenges faced by dealers in a quote-driven market? A. Forming Views B. Ensuring inventory availability C. Managing exposure

B&C Only

Bank Good and Bank Better enter edit default swap. The notional principal is EUR 25 million, the reference obligation is a Badco bond, and the maturity of the deal is one year. Bank Good pays a premium of 500 bps to Bank Better. In return, Bank Better agrees, in the event of the reference obligation defaulting, to pay Bank Good the difference between the face value of the reference bond and its post-default market value. Who is the protection buyer in this deal?

Bank Good

In an order-driven market, at what price will a trader place a sell market order? Bid Ask Offer

Bid

Which of the following statements is true in relation to trade enrichment and validation? Both trade enrichment and trade validation can only be implemented manually. Both trade enrichment and trade validation can only be implemented automatically. Trade enrichment can only be implemented manually while trade validation can only be implemented automatically. Both trade enrichment and trade validation can be implemented manually or automatically

Both trade enrichment and trade validation can be implemented manually or automatically

Which of the following are examples of how operational risk can impact credit risk? A. Movements in exchange rates that affect the ability of customers to repay their loans B. Decisions by central banks to increase interest rates (and therefore borrowing costs) C. Releasing security prior to repayment of a loan D. Errors in the processing of loan repayments made by customers)

C & D Only

Which of the following entities becomes a counterparty to each of the original counterparties through novation? Clearing House CCP CSD Custodian

CCP

Which of the following services are not provided by a typical custodian bank? Asset Servicing CCP Paying Agent Safekeeping

CCP

Which exchange offers benchmark futures contracts for cattle trading?

CME Group

Which of the following is the world's largest commodity derivatives market? CME Group Intercontinental Exchange London Bullion Market Dalian Commodity Exchange

CME Group

What is the dominant source of fuel for electricity generation worldwide? Coal Natural gas Oil

Coal

Which of the following is classified as a "soft" commodity? Gold Oil Copper Cocoa

Cocoa

What name is given to an entity that adds significant value to the commodities business by transforming commodities in space, time, and/or form? Commodity trading firm Hedger Speculator Exchange

Commodity trading firm

What name is given to a stipulation in a credit agreement that requires the borrower to conform to specific guidelines over the term of the credit? Collateral Condition Precedent Covenant

Covenant

In a forward contract, the requirement for each counterparty to put up collateral helps protect against: Credit Risk Basis Risk Liquidity Risk

Credit Risk

Which of the following statements is true? Credit risk limits should never be applied to individual loans or other transactions. Credit risk exposure fluctuates for revolving products Delivery versus payment (DVP) transactions result in increased exposure to settlement risk

Credit risk exposure fluctuates for revolving products

Which of the following statements is true? FOP settlement removes principal risk, while DVP settlement does not. DVP settlement involves the simultaneous transfer of securities and payment for those securities. FOP settlement is recommended by regulators as it reduces settlement risk

DVP settlement involves the simultaneous transfer of securities and payment for those securities.

Bank Good and Bank Better enter a credit default swap. The notional principal is EUR 25 million, the reference obligation is a Badco bond, and the maturity of the deal is one year. Bank Good pays a premium of 500 bps to Bank Better. In return, Bank Better agrees, in the event of the reference obligation defaulting, to pay Bank Good the difference between the face value of the reference bond and its post-default market value. During the year, the Badco defaults. The post-default price of the reference bond is 53.84 (Face Value = 100) How much must the protection seller pay the protection buyer in settlement of the credit default swap?

EUR 25,000,000 × (100 — 53.84)/100 = EUR 25,000,000 × 0.4616 = EUR 11,540,000 Compensation Payment = Notional Principal x (par value - market value after credit event / 100)

OTC derivatives are traded with: Standardized features only Nonstandardized features only Either standardized features or non-standardized features

Either standardized features or non-standardized features

Regulations such as Title VII of the Dodd-Frank Act in the US and the European Market Infrastructure Regulation (EMIR): Established stringent requirements for OTC derivatives trading Prohibited the trading of securities on dark pools Required all derivatives and securities to be traded on-exchange

Established stringent requirements for OTC derivatives trading

Which of the following types of cost are easiest to estimate pre-trade? Implicit costs Explicit costs Opportunity costs

Explicit Costs

Which of the following orders would be automatically canceled if not executed immediately? FOK order GTC order AON order

FOK Order

The taking of security/collateral eliminates the risk associated with the loan or obligation being collateralized True False

False

Liquidity risk is generally greater with which of the following: Forward contracts Futures contracts

Forward Contracts

A client that enters into a trade with exposures that offset the source of vulnerability in a portfolio is engaged in: View monetization Diversification Hedging Liquidation

Hedging

Offsetting commodity price risk by taking opposite positions in the derivatives market is referred to as Arbitrage Hedging Speculating Position Trading

Hedging

Which of the following bodies has been most responsible for fine-tuning the legal definitions underlying the credit derivatives market? CFTC ISDA Markit

ISDA

Which of the following entities has published "Master Agreements" for use by counterparties entering into OTC derivatives trades? ISDA FATF FinCEN Egmont Group

ISDA

Which of the following statements is false? If a cleared OTC product and an analogous futures contract have the same underlying characteristics, the OTC product can then be traded on a futures exchange. Due to the similarities between central clearing and futures margining, most CCPs are closely associated with the clearing houses of major futures exchanges Not every OTC forward contract is cleared centrally.

If a cleared OTC product and an analogous futures contract have the same underlying characteristics, the OTC product can then be traded on a futures exchange.

Which of the following statements is true? Where debt instruments of the same seniority and maturity are issued by the same entity, the credit spread will be identical irrespective of the form (for example, bond or loan) of the debt In most currencies, swap rates are usually higher than domestic government bond yields of the same maturity Holders of corporate FRNs can isolate the credit spread by entering into an asset swap where they receive variable rate and paid fixed;)

In most currencies, swap rates are usually higher than domestic government bond yields of the same maturity

A broker that fills an order using its own inventory rather than routing the order elsewhere is engaged in which of the following? Payment for order flow Onboarding Internalization

Internalization

Investcorp purchases USD 10 million five-year protection on Acme Products Inc. from Enormobank. The theoretical spread is 115 basis points per annum, but the contract has a conventional premium of 100 basis points per annum. How is the premium paid? Investcorp pays a quarterly premium of approximately USD 25,000 and receives an upfront payment from Enormobank equal to the present value of the 15 basis points over five years. Investcorp pays a quarterly premium of approximately USD 25,000 and pays an upfront payment to Enormobank equal to the present value of the 15 basis points over five years. Investcorp pays a quarterly premium of approximately USD 25,000. In the event of default, in addition to any default payment, it receives a payment from Enormobank equal to the compounded value (up to the point of default) of the 15 basis points. Investcorp pays a quarterly premium of approximately USD 25,000. In the event of default, in addition to a default payment, they make a payment to Enormobank equal to the compounded value (up to the point of default) of the 15 basis points.

Investcorp pays a quarterly premium of approximately USD 25,000 and pays an upfront payment to Enormobank equal to the present value of the 15 basis points over five years.

Which of the following statements about the EU's "cap and trade" emissions scheme (EU ETS) is true? - Installations that emit more than their cap must automatically pay a fine - It facilitates the selling of emission rights in the open market - It targets nitrogen dioxide emissions

It facilitates the selling of emission rights in the open market

Which of the following is the leading market for spot gold trading?

London Bullion Market

By definition, commodity producers have a natural:

Long Position

Which of the following is an implicit cost associated with securities trading? Market impact Taxes and government duties Brokerage commissions

Market Impact

Which of the following statements is true? If the margin account balance falls below the initial margin level, a margin call is automatically generated. Counterparty credit risk is eliminated even if a clearing house does not have a margining system in place. Market participants that have offsetting future positions will have their initial margin requirements reduced.

Market participants that have offsetting future positions will have their initial margin requirements reduced.

"Standardized" OTC forward contracts: Must be traded on a recognized trading exchange Must be cleared through a CCP Can only be traded if both an initial and a maintenance margin are paid

Must be cleared through a CCP

All other things being equal, credit risk assessment for a bank is more onerous in relation to: Existing customers, because they already have outstanding credit facilities and obligations with the bank New customers, because they have no relationship with the bank

New customers, because they have no relationship with the bank

Is it necessary for counterparties to OTC derivatives trades to negotiate a separate ISDA Master Agreement for each transaction? Yes No

No

Which of the following measures the likelihood that a borrower will default on its obligations? PD LGD EAD

PD

Most futures contracts specify: Cash settlement Physical settlement

Physical Settlement

When do trade clearing activities take place? Pre-trade execution and pre-settlement Pre-trade execution and post-settlement Post-trade execution and pre-settlement Post-trade execution and post-settlement

Post-trade execution and pre-settlement

Which of the following is a buyer of liquidity? Dealer Market maker Price taker

Price Taker

Which of the following buy at the ask price in a quote-driven market? Market makers Dealers Price takers

Price Takers

What is free-of-payment (FOP) settlement? Settlement whereby securities are only delivered if payment is made and payment is only made if securities are delivered. Settlement whereby the delivery of the securities and payment of funds take place separately. Settlement whereby the delivery of the securities takes place in lieu of cash payment Settlement whereby securities are only delivered if there are no prior claims on them.

Settlement whereby the delivery of the securities and payment of funds take place separately.

Which of the following is an order to place a market order conditional on a given stop price being reached? Limit Order Market Order Stop Order Stop-Limit Order

Stop Order

Which of the following is not an example of a credit event? Obligation acceleration Failure to pay Succession event

Succession Event

Which of the following statements about the credit derivatives market is true? In US markets, the reporting requirements for CDS trades apply only to contracts referencing investment grade names The majority of hedge fund trades involve selling protection to dealers The bulk of CDS trading involves contracts between dealers

The bulk of CDS trading involves contracts between dealers

Which of the following statements is true? The credit risk lifecycle is a continuous rather than a once-off process Credit approvers do not need to justify the reasons for declining a credit proposal Credit risk reporting is homogenous across all products.

The credit risk lifecycle is a continuous rather than a once-off process

A crude oil futures contract, based on an underlying of 1,000 barrels of a certain grade of crude, has an initial margin of USD 4,000 and a maintenance margin of USD 3,000. A trader buys 50 contracts at a price of USD 77.00 per barrel. What price would the futures contract have to fall beneath in order for the trader to receive a margin call?

The difference between the maintenance margin and the initial margin is USD 1,000. Since the contract size is 1,000 barrels, a fall of greater than USD 1 (to below USD 76) in the futures price from its current level will mean that the trader's margin falls below the maintenance level. Answer = 76

What is dematerialization? The elimination of book-entry securities by a central securities depository The elimination of physical securities by a central securities depository The restriction of the physical movement of securities certificates by a central securities depository

The elimination of physical securities by a central securities depository

Which of the following statements is true? The key distinguishing feature between an OTC forward and a futures contract is the bilateral negotiation of the price. The most popular futures contracts on US and European exchanges are usually related to equity products. Trading volumes in OTC FRAs collapsed following the implementation of regulatory changes enforcing mandatory clearing and reporting

The key distinguishing feature between an OTC forward and a futures contract is the bilateral negotiation of the price.

What is principal risk in the context of trade clearing and settlement? The risk that a principal to a transaction may not perform trade validation. The risk that a principal to a transaction may not perform trade capture. The risk that a party to a transaction that has fulfilled its obligations may not receive promised funds or securities.

The risk that a party to a transaction that has fulfilled its obligations may not receive promised funds or securities.

Which of the following statements is true? Cash settlement is not available with commodity futures The trade date is the date at which final settlement of a forward contract takes place Delivery dates for futures contracts are not typically standardized The spot price is the price that an asset is traded for immediate delivery.

The spot price is the price that an asset is traded for immediate delivery.

The CME butter futures contract has a contract size of 20,000 pounds of butter. Pricing is cents per pound, and the minimum price fluctuation is USD 0.00025 per pound. What is the tick value per contract?

The tick value = 20,000 × 0.00025 = USD 5.00.

Why do banks make loan loss provisions in their income statements? To recognize and cover losses in the loan portfolio To improve the quality of the loan portfolio To identify problems with the loan portfolio and take appropriate action

To recognize and cover losses in the loan portfolio

What is the function of a price collar in terms of pre-trade risk control? To set limits on the degree to which the price can be different to the market price To set upper limits on the size of orders To set limits on the number of orders sent to a trading venue over a given period of time To set limits on a market-maker's quote execution exposure

To set limits on the degree to which the price can be different to the market price

When does same day affirmation take place? Trade date T-1 Same day as the trade is confirmed Value date

Trade Date

Which of the following is the process that assesses whether the gathered information in relation to a trade is complete and accurate? Trade enrichment Trade validation Trade affirmation Trade confirmation

Trade Validation

What is the correct order of the following three activities in the trade clearing process? Trade enrichment, trade validation, trade agreement Trade validation, trade enrichment, trade agreement Trade agreement, trade enrichment, trade validation

Trade enrichment, trade validation, trade agreement

Which of the following statements concerning the credit derivative market is true? Most transactions involve mandatory trading platforms acting as principal Trading is largely conducted on an OTC basis The majority of European trades are conducted on SEFs

Trading is largely conducted on an OTC basis

An investor chooses to purchase 100 ounces of gold through a three-month forward contract, instead of buying it today. The three-month forward price of gold is USD 1,350 per ounce. Three months later the spot price for gold is at USD 1,300 per ounce and the three-month forward price is now USD 1,340. How much in total does the investor pay for the gold? USD 135,000 USD 130,000 USD 134,000

USD 135,000