Credit Risk Management Credit Derivatives and Structured Products 2

Question 1

What is 'attachment point' in a CDO or tranche structure?

Accepted Answer

The portfolio loss level at which a tranche starts experiencing losses

Answer

The attachment point defines the cumulative portfolio loss percentage at which a given tranche begins absorbing losses; below the attachment point, more junior tranches bear the loss.

Question 2

What is 'counterparty credit risk' in derivatives?

Accepted Answer

The risk that the counterparty to a derivative contract fails to fulfill its obligations

Answer

Counterparty credit risk is the risk that a derivatives counterparty defaults before the final settlement of the contract, resulting in a mark-to-market loss.

Question 3

What does CVA stand for in derivatives pricing?

Accepted Answer

Credit Valuation Adjustment

Answer

CVA is the market value of counterparty credit risk in a derivatives portfolio; it represents the expected loss from counterparty default, net of recovery.

Question 4

What is a 'basket CDS'?

Accepted Answer

A CDS that references multiple names, with triggers depending on the number of defaults in the basket

Answer

A basket CDS references a portfolio of names; variants include first-to-default (FTD) swaps, which are triggered by the first default in the basket.

Question 5

What does 'mark-to-market' mean in the context of a CDS position?

Accepted Answer

Valuing the CDS at current fair value based on prevailing market spreads

Answer

Mark-to-market (MtM) values a CDS position daily based on current market CDS spreads, reflecting changes in the reference entity's credit quality.

Credit Risk Management Practice Test

Credit Risk Management Practice Test

Credit Risk Management Credit Derivatives and Structured Products 2