Which of the Following Scenarios Offer an Example of Wrong

question 28

Multiple Choice

Which of the following scenarios offer an example of wrong way risk?

• A) A bank purchases credit protection on highly-rated tranches of US mortgage-backed securities from a US mortgage bank
• B) A bank sells protection on the iTraxx main index at a level of 25 bps and shortly afterwards the index crosses the 200 bps level
• C) A bank sells EUR put I USD call ATM options with an expiry date of 6 months and afterwards volatility moves up to substantially higher levels
• D) A bank enters into a receiver's swap while interest rates are increasing

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Definitions:

Residual Income

Earnings that exceed the minimum required return on a company's operating assets, demonstrating the excess of net operating income over its cost of capital.

Net Profit

The real income remaining after deducting operating costs that aren't considered in determining gross profit.

Invested Capital

The total amount of money that has been invested into a company by its owners, shareholders, and creditors, used for acquiring assets and funding operations.

Investment Turnover

A financial ratio that measures the efficiency of a company's use of its investments in generating sales revenue.