Credit Risk Management Counterparty Credit Risk

Question 1

Which measure represents the maximum potential exposure to a counterparty at a specified confidence level over a given time horizon?

Accepted Answer

Potential Future Exposure (PFE)

Answer

Expected Exposure (EE)

Answer

Credit Value Adjustment (CVA)

Answer

Loan Equivalent Exposure (LEE)

Question 2

Credit Value Adjustment (CVA) is best described as:

Accepted Answer

The market value of counterparty credit risk embedded in a derivatives portfolio

Answer

The spread charged on a corporate bond above the risk-free rate

Answer

The regulatory capital charge under Basel III for market risk

Answer

The loss given default on a secured loan

Question 3

Under a standard ISDA Master Agreement, netting reduces counterparty credit risk by:

Accepted Answer

Allowing positive and negative mark-to-market values across transactions to offset each other

Answer

Requiring additional collateral posting when exposure exceeds a threshold

Answer

Transferring credit risk to a central counterparty

Answer

Capping the maximum exposure at the notional amount

Question 4

Wrong-Way Risk (WWR) in counterparty credit risk refers to a situation where:

Accepted Answer

The exposure to a counterparty increases as the counterparty's creditworthiness deteriorates

Answer

A counterparty posts collateral of decreasing quality over time

Answer

Netting agreements are legally unenforceable in a bankruptcy jurisdiction

Answer

Mark-to-market losses exceed posted initial margin

Question 5

The Expected Positive Exposure (EPE) metric is primarily used for:

Accepted Answer

Calculating regulatory capital for counterparty credit risk under Basel rules

Answer

Setting the credit limit for a single counterparty transaction

Answer

Determining the credit spread on a newly issued bond

Answer

Estimating the recovery rate on defaulted derivatives

Question 6

Which of the following best describes a Credit Support Annex (CSA)?

Accepted Answer

A legal document that specifies the terms for collateral exchange between OTC derivatives counterparties

Answer

A bond covenant that restricts the issuer's ability to take on additional debt

Answer

A regulatory requirement for central clearing of standardized derivatives

Answer

An amendment to a loan agreement that adds credit enhancement provisions

Question 7

In the context of counterparty credit risk, the 'Threshold' in a CSA refers to:

Accepted Answer

The unsecured exposure level below which no collateral is required

Answer

The minimum credit rating a counterparty must maintain to transact

Answer

The maximum notional amount permitted under the master agreement

Answer

The confidence level used to compute Potential Future Exposure