Question

1. An investment bank is late settling a futures trade. As a result their counterparty asks for collateral the next time they do a trade. What kind of risk is this an example of?. Single choice.

A. Liquidity

B Credit

C. Market

D. Reputational

2.

Two counterparties agree cash settlement of a oil call option. The strike price is $5.20, the spot price is $5.30 and the premium is $0.05. Which of the following describes how settlement would take place?. Single choice.

A. The holder will pay the writer $5.20 per gallon and the writer will supply the oil.

B. The holder will not exercise the option and nothing would change hands.

C. The writer will pay the holder 10¢ per gallon.

D. The holder will pay the writer 10¢ per gallon.

3.  

What is amount of the next coupon payment for an investor holding a $10,000 Treasury 8% 2020 if it is trading at $10,034?. Single choice.

A. $400.00

B. $307.00

C. $704.00

D. $800.00

Please answer all these 3

Answer 1

Answer 1) Option b) Credit Risk

Credit Risk is the risk of loss due to a counterparty's failure or inability to pay an obligation due in part or the full amout.

Credit Risk can be mitigated through collateral as if the borrower defaults, the issuer can sell the collateral and use the proceeds to recover his/her money.

Option a) is incorrect since Liquidity Risk is the risk of loss in value of security due to inability to convert it into cash without loss in value. This happens majorly due to degrading market conditions or lack of market participants.

Option c) is incorrect since Market risk , also known as systematic risk is common to all companies operating in the market due to factors that impact the overall performance of the market. Example: Increase in Inflation.

Option d) is incorrect since Reputational risk is the risk of danger to the goodwill, name or market position of a business or an entity.

Answer 2) Option A) The holder will pay the writer $5.20 per gallon and the writer will supply the oil

Oil call option gives the buyer an option to purchase oil at the strike price by paying option premium. In simple words, it is the right to buy at the strike price.

The buyer will exercise the option only when the spot price is higher than the strike price such that the buyer earns profit.

Since in our case, the strike price (5.2) is less than the spot price (5.3) , the option will be exercised by the buyer.

Option b) is incorrect since the buyer will exercise the option to buy oil at lesser price than spot price in market.

Option c) is incorrect since the writer will not pay the holder 10cents as the writer has an obligation to supply the oil at strike price.

Option d) is incorrect since the holder will not pay the writer 10 cents based on above mentioned explanations.

Answer 3) Option D) 800,000

Coupon payment is calculated as a percentage of face value of bond.

Coupon Payment= Face Value * Coupon Rate

Coupon Payment= 10,000*8% = 800

Other options are incorrect based on above mentioned working