What Do You Know About Numerix Company? Trivia Questions Quiz

The given answer "down" suggests that the oil Exploration & Production company is at risk when the price of oil decreases. This is because a decrease in the price of oil would result in lower revenues for the company, potentially impacting their profitability and financial performance. As a result, the company may face challenges in maintaining their operations, investments, and overall growth. Therefore, a downward movement in the price of oil poses a risk to the company's financial stability and success.

By charging all swap clients the appropriate CVA spread, a swap desk can mitigate Counterparty Credit Risk. CVA (Credit Value Adjustment) spread is the compensation charged to clients to cover the potential credit risk associated with their trades. By charging this spread, the swap desk is effectively transferring the credit risk to the clients, reducing their own exposure. This helps to protect the swap desk from potential losses in case of default by a counterparty, thereby mitigating Counterparty Credit Risk.

An interest rate swap involves an agreement between two parties to exchange fixed and floating interest rate payments on specific dates in the future. One party agrees to pay a fixed rate, which is set at the beginning of the swap, while the other party agrees to receive this fixed rate. In return, the party receiving the fixed rate agrees to pay a floating rate, which changes over time. Therefore, the statement that an interest rate swap is an obligation to pay a fixed rate and receive a floating rate on predetermined dates in the future is true.

Derivatives reform regulation aims to enhance transparency and reduce risk in the banking sector. One way to achieve this is by implementing Central Clearing Parties (CCPs). CCPs act as intermediaries between parties involved in derivative transactions, ensuring that all trades are properly documented and settled. By using CCPs, regulators can monitor and manage systemic risk more effectively, thereby reducing the chances of a financial crisis. Therefore, the statement that increasing transparency and mitigating risk through the use of CCPs is one of the primary goals of derivatives reform regulation is true.

By entering into a swap to RECEIVE fixed and PAY LIBOR for 2 years, the speculator is essentially betting that interest rates will go lower. In this swap, the speculator will receive a fixed interest rate (which is expected to be higher than the LIBOR rate) and pay the LIBOR rate. If interest rates do go lower, the speculator will benefit from receiving the higher fixed rate and paying the lower LIBOR rate.

Leverage refers to using borrowed funds or debt to finance an investment or asset. In the given answer, posting an initial margin of $10,000 on a contract worth $100,000 indicates that the investor is leveraging their investment by borrowing a significant portion of the contract value. This allows them to control a larger asset value with a smaller upfront investment. By leveraging, the investor has the potential to amplify their gains or losses depending on the performance of the asset.

Liquidity risk refers to the risk of not being able to sell an asset quickly and at a fair price without causing a significant impact on its market price. In this case, the trader owns bonds but cannot find a bid to sell them, indicating a lack of liquidity in the market for those bonds. Therefore, this statement most closely defines liquidity risk.

This swap will make money as rates go up. When rates increase, the floating rate received by the client (3MONTH LIBOR) will also increase, resulting in higher payments received. However, the fixed rate paid by the client (2.50%) remains the same, so the client will benefit from the higher floating rate.

The correct answer is Credit Risk. Credit risk refers to the risk of loss due to the counterparty's inability or unwillingness to fulfill their financial obligations. In this scenario, the trader sees that one of the larger counterparties has announced bad news which widened out their CDS spreads, leading to a loss of $20 million. This indicates that there is a credit risk associated with the counterparty, as their financial situation has deteriorated and they may not be able to fulfill their obligations.

The explanation for the given correct answer is that a bank adjusts the fixed rate of an interest rate swap to cover the bank's counterparty credit risk. This adjustment is called CVA, which stands for Credit Valuation Adjustment. This is done in case the client defaults or fails to make timely payments, ensuring that the bank is protected from potential losses.

To hedge the risk mentioned, an oil exploration and production company would sell futures or forwards. Selling futures or forwards allows the company to lock in a future selling price for their oil, mitigating the risk of price fluctuations. By selling these contracts, the company can ensure a certain level of revenue even if the market price of oil decreases. This strategy helps to protect the company's profits and provides stability in an unpredictable market.

A short call option involves selling a call option without owning the underlying asset. The seller of the call option has the obligation to sell the asset at a predetermined price (strike price) if the buyer of the option decides to exercise it. The risk in a short call position is unlimited because there is no limit to how high the price of the underlying asset can rise. On the other hand, the reward is limited to the premium received from selling the call option. Therefore, the statement "Unlimited Risk, Limited Reward" best reflects the risk/reward profile of a short call.

Swap dealers are required to execute their swaps using a Swap Execution Facility (SEF) as per regulations set forth by the Dodd-Frank Act. SEFs are platforms that provide a centralized marketplace for trading swaps. This requirement aims to increase transparency and promote fair and efficient trading of swaps. Therefore, the statement "All Swap dealers must execute their swaps using a Swap Execution Facility (SEF)" is true.

Corporations are exempt from submitting Interest Rate Swap contracts to a Central Clearing Counterparty CCP. Instead, they will enter into a swap with one or more dealers. This type of swap is referred to as a bilateral swap.

Economic Capital refers to the capital that a bank sets aside to cover potential losses arising from its risk-taking activities. This capital is used to post collateral and support the bank's positions, ensuring that it has enough funds to cover any potential losses. Therefore, the statement that Economic Capital is the capital used to post collateral and carry positions of the bank is true.

A swap has very little risk at inception because both parties enter into the swap agreement willingly and with the intention to benefit from it. However, as time passes and market conditions change, the risk associated with the swap may increase. This is because the value of the swap can fluctuate due to changes in interest rates, exchange rates, or other relevant factors. Therefore, the risk of the swap reaches a peak approximately halfway through its life when these market fluctuations are most likely to occur.

A "haircut" in the context of collateral posting refers to the reduction in value applied to the securities being used as collateral. In this case, if a security has a 5% haircut, it means that the value of the securities will be reduced by 5% when determining the amount of collateral that needs to be posted. Therefore, if $100 million in securities has a 5% haircut, the collateral posting required would be $95 million, as the value of the securities is reduced by 5%.

Under The Dodd Frank Act of 2010, most swap participants are required to submit their trades to a clearinghouse, which helps to reduce counterparty risk and increase transparency in the market. Additionally, participants are also required to pay losses or receive profits daily, which helps to ensure that any potential losses are promptly addressed and mitigated. Therefore, the correct answers are A & C.

Under the Dodd Frank Act of 2010, an interest rate swap that is not submitted to a clearinghouse must have an ISDA Master Agreement & Annexes. This means that parties involved in the swap must have a legally binding agreement in place that outlines the terms and conditions of the swap, including any additional annexes that may be required. The ISDA Master Agreement is a standardized document commonly used in the derivatives market to govern transactions. Therefore, the correct answer is "Must have an ISDA Master Agreement & Annexes."