After a long time I am putting few basic quiz questions,  Lets check out who hit the bull’s eye. You can provide your answers by putting imagesup the comments , there are only two questions but they will help to understand the basics OTC derivative market:

  • What is correct about a credit default swap (CDS)?
  1.  A CDS is the exchange of two cash flows: a fee payment and a conditional payment, which occurs only if certain circumstances are met.
  2. The CDS will have value for the protection seller only if defined credit conditions are met
  3. The protection seller will always receive the premiums.
  4. CDS is a type of insurance in which default of an asset triggers payment

a) I, II

b) III, IV

c) I, III, IV

d) I, II, III, IV

  • What is correct about swap agreements used in the creation of an ETF ?
  1. Leveraged and inverse ETFs typically use swap agreements to deliver the leveraged and/ or inverse return of an underlying asset.
  2. In an unfunded swap structure, an ETF obtains the leveraged or inverse return from a swap provider in exchange of the return of a portfolio chosen by the swap provider.
  3. In an unfunded structure, the portfolio is retained by the ETF and serves as collateral in case of default by the swap provider
  4. In a funded swap structure, an ETF also obtains the leveraged or inverse return from a swap provider but against a cash deposit that the swap provider utilizes to hedge its risk exposure. The swap provider has to post collateral that is pledged to the ETF.

a) I, II

b) I, II, III

c) III, IV

d) I, II, III, IV

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