Principles of OTC Derivatives Flashcards
Which of the following is false concerning Bermudan options?
They can be exercised more than once
Which of the following bodies sets out processes and documentation for the OTC derivatives markets?
International Swaps and Derivatives Association
If you were a borrower and were concerned that interest rates will rise, which of the following contracts would you enter into?
Long FRA
Which of the following is not a benefit of a trade capture and confirmation system, such as MarkitServ, for an OTC product?
Novation on a principal to principal basis
A fund manager believes the FTSE 100 will increase in value and enters into a receiver total return swap, where equity returns are swapped for a floating rate. During this period of time the index falls in value.
Which of the following will the fund manager have to do?
Make floating rate interest payments and payments to the swap dealer for the decrease in the value of the index
Which of the following is TRUE regarding where a confirmation sits in the architecture of the ISDA documentation?
The specific terms of the confirmation override the details of the master agreement
As identified by the ISDA credit support documentation, what is the main difference between UK and US law?
Any collateral deposited in the US remains the legal property of the depositor whereas in the UK title transfers to the holder
A firm that has a master agreement benefits in which of the following ways?
It allows confirmations to be considerably shorter
When an investor takes out an interest rate swap where the notional principal decreases over time the swap is said to be:
Amortising
A bank believes that a single debtor has become too risky for them to continue to take on the risk of their debt. What could the bank do to transfer the risk of the debtor to a third party?
Issue a credit linked note
OTC products on the inter-continental exchange (ICE) can be traded:
Bilaterally or electronically
In managing a firm’s collateral a bank can provide which of the following services?
Marking to market of contracts
Monitoring the value of collateral
Managing delivery and return amounts
Paying interest on cash collateral
Which of the following is the best definition of being long a FRA?
Agreeing to pay a fixed rate of interest and receive a variable rate
Which of the following is the best description of a swaption?
The holder can exercise the option and enter into a swap
Which of these would protect against price rises but limit gains from price falls?
Buying a collar.
The best description of a zero coupon inflation swap is:
A single exchange of cash flow at maturity based on the movement of the consumer price index
Which of the following best describes the characteristics and uses of an amortising swap?
The principal is reduced over the life of the swap to net off against a matching liability
Which of the below is TRUE of forward contracts traded away from an exchange?
All components of the contracts are negotiated fully by the counterparties
Which document sets out the relationship between two institutions when one party executes a trade but another party becomes the ultimate counterparty of the trade?
Master give up agreement
Which of the following is not a criterion for a dealer member to use SwapClear?
Be an LCH Group shareholder
How might an investor gain exposure to the returns on a portfolio of shares without incurring the cost of buying the shares and paying stamp duty?
Equity swap
Which of the following trading methods offers the best possibility for market users to have straight through processing (STP) of their trades?
Electronic trading
Which ONE of the following is a benefit of the over-the-counter derivatives market over the exchange-traded market?
Confidentiality
If an investor wishes to protect themselves from a rise in interest rates but does not want to take on excessive risk, they could:
Buy a cap
Which one of the following is not a type of credit default swap (CDS)?
Currency
A FLEX option gives the investor all of the following benefits over a standard exchange-traded option, except:
Flexibility for the long as to whether the option will be exercised or not
Which of the following contracts are ALWAYS exchange-traded?
Futures
What is the benefit of trading OTC?
Flexibility
Which of the following is a characteristic of a forward FX contract?
It is physically delivered
Which system allows the inter-bank swap market a facility to free-up credit lines, reduce risk and use capital?
SwapClear
What could be considered a credit event?
Default on payment Restructuring
Bankruptcy of issuing company
Which of the following is FALSE of an ISDA master agreement?
It replaces confirmations
While checking a confirmation, which of the following would a firm be looking for?
That the deal is in line with their own policies
That the deal does not breach any credit lines
That there are no errors in the deal itself
That the deal is suitable, if trading for a third party
The payout from which of the following products relies on the difference between the yield on a particular asset and a benchmark yield?
Credit spread option
An investor buys a bond with a BBB- credit rating.
Why would they take out a credit default swap on the bond?
To protect the investor from a credit event
basis swap
particular type of interest rate swap where a floating rate is swapped for a different floating rate.
An option where the holder has the right to buy or sell an asset at the lowest or highest price over a particular period of time is called?
A lookback option
What is the purpose behind a firm maintaining adequate records of collateral?
To enable the return of equivalent assets when a client fulfils their obligations
Which document is negotiated and signed by the buyer and seller of OTC contracts and can cover different contracts in different currencies?
Master agreement
What is the name of LCH Group’s OTC clearing system?
SwapClear
Borrowers with a variable rate of interest might use which of the following to protect themselves from rising interest rates?
Cap
When would the agreed amount be paid on a forward foreign exchange contract agreed over the counter?
On the settlement date
FpML is used in derivatives markets in order to:
Automate the flow of information across derivatives networks
Company A is paying a fixed rate of interest on a loan to a bank. It wishes to hedge this position with a vanilla interest rate swap (IRS). Bank C negotiates the IRS and takes on the role of central counterparty. At the same time Bank C hedges their own position by entering into a floating for fixed IRS with Company B. What combination of events would create an unanticipated risk that Company A is exposing themselves to?
Bank C falling into liquidation and Interest rates falling
Which of the following BEST describes a disadvantage facing firms that choose the OTC market over the exchange-traded market?
Too much credit exposure
A credit derivative contract is based on a:
Reference asset
For what reason would you exercise a receiver swaption?
Because interest rates have dropped so the option is in-the-money
Who acts as central counterparty to all transactions on SwapClear?
LCH Group
Which of the following is the best description of an equity swap?
A contract where one party pays a floating rate of interest and receives the return on an index or share
Which of the following best describes a convertible bond?
A fixed rate bond and a call option on equity
Which one of the following options embedded in a bond can be exercised by the issuer of the bond, under certain circumstances defined for that particular bond?
Callable
The long-term objective of FpML is:
To bring OTC information processing in-line with exchange protocols
Which of the following is a single currency basis swap?
3m $ LIBOR for 6m $ LIBOR
What type of option gives the holder the right to buy (or sell) an asset at the lowest (or highest) price over a period of time?
Path dependent option
Bclear is used for?
Clearing OTC equity derivatives
