2016-FRR Dumps with Practice Exam Questions Answers

Herd behavior in the context of credit defaults refers to a situation where the stigma of default decreases, leading more borrowers to default as they see others doing the same. This creates a pattern of increasing defaults in the neighborhood as more borrowers follow the trend.

References:

How Finance Works: "Defaults increasing as the stigma evaporates and more borrowers follow suit is indicative of herd behavior."

Rho is a measure of the sensitivity of an option's price to changes in interest rates. If rho is positive, it means that the price of the option will increase when interest rates rise. This is because higher interest rates generally increase the cost of carry, which can make holding the underlying asset more expensive and thus increase the value of the option.

The formula to estimate a partial change in an option's price based on the change in the underlying asset's price is primarily dependent on the option's Delta. Delta represents the sensitivity of the option's price to changes in the price of the underlying asset. Therefore, the most straightforward and widely used formula to estimate this partial change is:Partial change in option price=Δ×Change in underlying pricePartial change in option price=Δ×Change in underlying priceThis formula directly utilizes Delta to measure the immediate rate of change in the option's price relative to a small change in the underlying asset's price. The other options involving Gamma are more complex and not typically used for simple partial changes.

When a credit analyst evaluates spreads in loans, they focus on compensating for costs such as the marginal cost of funds provided, overhead costs of maintaining the loan, and inherent risks of lending to the borrower. However, the opportunity cost of the risk-adjusted marginal cost of capital is not typically considered directly in the spreads. The opportunity cost generally refers to the potential returns from alternative investments, which isn't a direct component of loan spread calculations.

Corporate customers use foreign exchange derivatives for several reasons:

To lock in the current value of foreign-denominated receivables (I)

To lock in the current value of foreign-denominated payables (II)

To lock in the value of expected future foreign-denominated receivables (III)

To lock in the value of expected future foreign-denominated payables (IV) These derivatives are used as a hedging mechanism to manage currency risk and provide certainty regarding future cash flows and costs.