Credit Risk Management Counterparty Credit Risk 3

Question 1

Which regulatory framework introduced the mandatory clearing and margining requirements for standardized OTC derivatives in the United States?

Accepted Answer

Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)

Answer

Sarbanes-Oxley Act (2002)

Answer

Gramm-Leach-Bliley Act (1999)

Answer

Bank Secrecy Act (1970)

Question 2

The Internal Model Method (IMM) for counterparty credit risk allows banks to:

Accepted Answer

Use their own risk models to compute EPE for regulatory capital, subject to supervisory approval

Answer

Bypass counterparty credit risk capital requirements for fully collateralized trades

Answer

Apply a fixed add-on factor to notional amounts to estimate future exposure

Answer

Calculate credit risk capital using external credit agency ratings exclusively

Question 3

The 'Alpha' multiplier (typically set at 1.4) in the Basel CCR framework is applied to:

Accepted Answer

The Effective EPE to convert it into a stressed Exposure at Default measure

Answer

The loss given default on secured counterparty exposures

Answer

The probability of default for counterparties with no external rating

Answer

The recovery rate assumption for central counterparties

Question 4

A Credit Valuation Adjustment (CVA) desk at a bank primarily manages risk by:

Accepted Answer

Hedging the CVA P&L volatility using CDS, index options, and swaptions

Answer

Setting loan loss provisions for the corporate lending portfolio

Answer

Approving new counterparty credit limits for derivative transactions

Answer

Conducting internal stress tests of the bank's liquidity buffers

Question 5

Under EMIR (European Market Infrastructure Regulation), which types of OTC derivatives are subject to mandatory central clearing?

Accepted Answer

Standardized OTC derivatives between financial counterparties above a clearing threshold

Answer

All OTC derivatives regardless of standardization or counterparty type

Answer

Only foreign exchange spot transactions between banks

Answer

Commodity derivatives traded on regulated exchanges

Question 6

Which of the following best describes the 'jump-to-default' risk in a Credit Default Swap (CDS) from the protection seller's perspective?

Accepted Answer

The risk of an immediate large loss if the reference entity defaults before the CDS can be hedged

Answer

The risk that the CDS spread widens before the position can be unwound

Answer

The risk that the protection buyer fails to pay periodic premiums

Answer

The risk that the notional amount of the CDS exceeds the outstanding debt of the reference entity

Question 7

In counterparty credit risk management, a 'break clause' (or mutual put) in a long-dated derivatives contract serves to:

Accepted Answer

Limit counterparty credit risk exposure by giving either party the right to terminate at predetermined dates

Answer

Allow regulators to terminate the contract if systemic risk thresholds are breached

Answer

Require the posting of additional collateral when credit ratings fall below investment grade

Answer

Transfer counterparty risk to a guarantor entity at periodic intervals