Credit Spread Call Options Are Useful Because

question 18

Multiple Choice

Credit spread call options are useful because

• A)its value increases as the risk premium on a specified benchmark bond of the borrower increases above some exercise spread.
• B)an increase in the value of the call option will tend to offset the decreasing value of an FI's loan and net worth as the credit quality of the borrower decreases.
• C)they will always cause a loss at least equal to the required premium on the option.
• D)All of the options.
• E)its value increases as the risk premium on a specified benchmark bond of the borrower increases above some exercise spread and an increase in the value of the call option will tend to offset the decreasing value of an FI's loan and net worth as the credit quality of the borrower decreases.

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Definitions:

Milgram Experiment

A psychological experiment conducted by Stanley Milgram in the 1960s to study obedience to authority, where participants were instructed to administer electric shocks to another person.

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A psychological study conducted by Philip Zimbardo in 1971 at Stanford University, where students were assigned roles of prisoners and guards to explore the effects of perceived power.

Generalization

Drawing a conclusion about a certain characteristic of a population based on a sample from it.

Logical Support

The provision of reasons or evidence to justify a claim or argument.