aianjie

 

2、The difference between the mean loss rate and the risk-neutral mean loss rate is the:

A) risk free rate.

B) probability of default times the recovery rate.

C) risk premia for accepting higher default risk.

D) probability of default times 1 minus the recovery rate. 

aianjie

 

The correct answer is C

Netting is the process of consolidating the exposures between two parties to a single net exposure that one party bears. Marking to market would not apply to a case where two parties have obligations to each other.

aianjie

 

AIM 2: Identify and explain the steps of using a Monte Carlo simulation engine to model potential future exposure to a counterparty, and discuss considerations for applying such a model to various market instruments.

1、The specification of a simulation model requires the selection of a stochastic process. The stochastic process is different depending on the underlying asset being evaluated. Which of the following are usually modeled with a jump-diffusion process?

  I. Commodities with low liquidity.

 II. Frequently traded equity securities.

III. Currencies of emerging market countries.

IV. Interest rates that are considered to be high.

A) I and IV only.

B) I, II and III only. 

C) I and III only.

D) I, II, III, and IV. 

aianjie

 

The correct answer is C

Statements I and III are correct. Market instruments that are usually modeled using a lognormal distribution include: high interest rates, major currencies, commodities with a high degree of liquidity and equities with a high degree of liquidity. Equities and commodities that lack liquidity, and currencies of emerging market countries are modeled with a jump diffusion process. Low interest rates are sometimes assumed to follow a normal diffusion process