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Question 1

The following statements about interest rate swaps are all correct, EXCEPT...?

Something like a swap can be constructed with parallel loans, but it absorbs more balance sheet space

A long swap position pays fixed rate and receives flexible rate

Interest rate swaps have exactly the same counterparty risk as the analogous parallel loan construction

In a swap that is constructed as a parallel loan, both parties still pay their original creditor the agreed rate over the life of the loan

Question 2

All of the following statements about market making in swaps are correct, EXCEPT...?

Counterparty risk creates incentive for swaps because swaps have less such risk than the analogous parallel loan construction

Swap dealers hedge long swap exposure with short swap exposure, since they can't use forwards or futures

Credit market imperfection creates incentive for swaps when it causes distortion of lending rates

Swap dealers make money by selling swaps at a different price than they buy swaps

Question 3

In lecture we discussed how a corporate bond could be divided into three parts. What are they?

Risky asset, credit risk, interest rate risk

Risk-free asset, credit risk, interest rate risk

Collateral, liquidity risk, credit risk

Liquidity risk, interest rate risk, credit risk

Question 4

Which of the following statements accurately characterizes the cash flow of a buyer of a CDS without mark-to-market features?

He makes or receives payments depending on fluctuation of the price of the reference risky bond

He pays a small amount in each time period, and receives a large amount in the case of default

He makes or receives payments depending on fluctuation of the market price of the CDS

He pays a certain amount up front for the CDS, and receives another amount if the bond defaults

Question 5

All of the following statements about the CDS market are true, EXCEPT..?

The CDS market is more liquid than the market in the risky bonds referenced by CDS

The value of CDS fluctuates over time

A portfolio of a corporate bond plus CDS and IRS has the identical cash flow as a portfolio of a Treasury bond plus IRS.

Holding a risky CDO plus CDS as insurance on that CDO entails more liquidity risk than simply holding a riskfree Treasury bond

Question 6

Which of the following statements about swaps is CORRECT?

Swap markets increase aggregate risk by expanding risk exposure to a multiple of the underlying referenced risky assets

The quantity of swap contracts is limited by the quantity of the underlying referenced risky assets

Sovereign who issue their own currency can never default, so credit default swaps make no sense in this case

A swap contract moves risk from one counterparty to another

In accordance with the Coursera Honor Code, I (KK Fong) certify that the answers here are my own work.

You cannot submit your work until you agree to the Honor Code. Thanks!

Economics of Money and Banking, Part Two

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by Perry G Mehrling

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Economics of Money and Banking, Part Two

Economics of Money and Banking, Part Twoby Perry G Mehrling

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Economics of Money and Banking, Part Two
by Perry G Mehrling