Bank a Holds a Credit Risky Asset on Its Balance

question 17

Multiple Choice

Bank A holds a credit risky asset on its balance sheet. It enters into a total return swap (TRS) referenced to this asset with hedge fund B to pay the total return to B and receive Libor in return. Under what scenario does bank A bear credit risk on the reference asset this contract?

• A) When the issuer of the reference asset defaults.
• B) When hedge fund B defaults.
• C) Only when the issuer of the reference asset and hedge fund B default.
• D) All of the above.

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Definitions:

Simple Linear Regression Model

A statistical method for understanding the relationship between two continuous variables by fitting a straight line to the observed data.

Y-Intercept

The point where a line or curve intersects the Y-axis of a graph, often representing the initial condition or value when all other variables are zero.

Regression Model

A statistical approach to modeling the relationship between a dependent variable and one or more independent variables.

Relationship Between Two Variables

A statistical or causal connection between two types of variables or data sets.