A Derivatives Dealer Has a Single Transaction with a Company

question 7

Multiple Choice

A derivatives dealer has a single transaction with a company which is a long position in a five-year option.The Black-Scholes-Merton value of the option is $6.Suppose that the credit spread on five-year bonds issued by the company is 100 basis points.What is the dealer's CVA per option purchased from the counterparty?

• A) $0.19
• B) $1.19
• C) $0.29
• D) $1.29

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Definitions:

Self-fulfilling Prophecy

A belief or expectation that influences behavior in a way that causes the belief to become a reality.

Stereotype

A set of beliefs and expectations about members of a group that are held simply because of their membership in the group.

Multitasking

The ability to perform multiple tasks at the same time.

Processing Channel

Refers to the means by which information is encoded, stored, and retrieved by the cognitive system, often differentiated into verbal and nonverbal channels.