Which one of the following four exotic option types has another option as its underlying asset, and as a result of its construction is generally believed to be very difficult to model?

A. Spread options

B. Chooser options

C. Binary options

D. Compound options

A credit risk analyst is evaluating factors that quantify credit risk exposures. The risk that the borrower would fail to make full and timely repayments of its financial obligations over a given time horizon typically refers to:

A. Duration of default.

B. Exposure at default.

C. Loss given default.

D. Probability of default.

Which of the following statements regarding bonds is correct?

I. Interest rates on bonds are typically stated on an annualized rate.

II. Bonds can pay floating coupons that are directly linked to various interest rate indices.

III. Convertible bonds have an element of prepayment risk.

IV.

Callable bonds have an element of equity risk.

A.

I only

B.

I and II

C.

I, II, and III

D.

II, III, and IV

Forward rate agreements (FRA) are:

A. Exchange traded derivative contracts that allow banks to take positions in forward interest rates.

B. OTC derivative contracts that allow banks and customers to obtain the risk/reward profile of long-term interest rates by relying on long-term funding.

C. Exchange traded derivative contracts that allow banks to take positions in future exchange rates.

D. OTC derivative contracts that allow banks to take positions in forward interest rates.

The risk management department of VegaBank wants to set guidelines on commodity carry trades. Which of the following strategies should she pursue to achieve a profitable commodity carry?

I. Buy short-term commodity futures and sell longer-dated position when the curve is in contango.

II. Buy short-term commodity futures and sell longer-dated position when the curve is in backwardation.

III. Buy long-term commodity futures and sell shorter-dated positions when the curve is in contango.

IV.

Buy long-term commodity futures and sell shorter-dated positions when the curve is in backwardation.

A.

I, II

B.

I, III

C.

II, IV

D.

I, IV