Hull: Options, Futures, and Other Derivatives, Tenth Edition

Chapter 9: XVAs
Multiple Choice Test Bank

1. Which of the following is NOT a valuation adjustment

A. CVA
B. MVA
C. ZVA
D. KVA

2. CVA stands for

A. Collateral valuation adjustment
B. Credit valuation adjustment
C. Credit valuation agreement
D. Collateral valuation agreement

3. DVA stands for

A. Debt valuation adjustment
B. Debt valuation agreement
C. Debt variation adjustment
D. Debit valuation agreement

4. When a bank’s borrowing rate goes up, which of the following is true
A. DVA increases so that the bank’s profit goes down
B. DVA increases so that the bank’s profit goes up
C. DVA declines so that the bank’s profit goes down
D. DVA declines so that the bank’s profit goes up

5. Which of the following is true

A. CVA and DVA can be calculated deal by deal
B. CVA and DVA must both be calculated for the whole portfolio a bank has with a
counterparty
C. CVA can be calculated deal by deal but DVA must be calculated for a portfolio
D. DVA can be calculated deal by deal but CVA must be calculated for a portfolio

6. It is assumed that a company can default after one year or after two years. The probability of
default at each time is 1.5%. The present value of the expected loss to a bank on a derivatives
portfolio if the company defaults after one year is estimated to be $1 million. The present value
of the expected loss if it defaults after two years is estimated to be $2 million. Which of the
following is the bank’s CVA ?
A. $3,000,000
B. $300,000
C. $45,000
D. $150,000

.
7. A bank has three uncollateralized transactions with a counterparty worth +$10 million, −$20
million and +$25 million. A netting agreement is in place. What is the maximum loss if the
counterparty defaults today.
A. $15 million
B. $35 million
C. $20 million
D. Zero

8. Which of the following involves most credit risk

A. Exchange trading
B. OTC trading with a central clearing party being used
C. OTC trading with bilateral clearing and collateral being posted
D. OTC trading with bilateral clearing and no collateral being posted

9. FVA is concerned with

A. The cost of funding initial margin
B. The cost of funding variation margin
C. The cost of regulatory capital
D. None of the above

10. MVA is concerned with

A. The cost of funding initial margin
B. The cost of funding variation margin
C. The cost of regulatory capital
D. None of the above

11. KVA is concerned with

A. The cost of funding initial margin
B. The cost of funding variation margin
C. The cost of regulatory capital
D. None of the above

12. CVA is concerned with

A. The cost of funding initial margin
B. The cost of funding variation margin
C. The cost of regulatory capital
D. None of the above

13. Financial economics argues that

A. All investments by a company should earn the company’s weighted average cost of
capital
B. The required expected return on an investment is the average cost of debt
C. The required expected return on an investment increases with the riskiness of the
investment
D. The required expected return on an investment decreases with the riskiness of the
investment
14. Financial economics argues that as the percentage of equity in the capital structure increases
A. The required return on both equity and debt decrease
B. The required return on equity decreases and the required return on debt increases
C. The required return on equity increases and the required return on debt decreases
D. The required return on both equity and debt increase

15. DVA for a bank is most dependent on

A. The default probabilities of the bank in future time periods
B. The default probabilities of the bank’s counterparties in future times periods
C. Both A and B
D. Neither A nor B

16. Which of the following is true

A. FVA is always positive
B. FVA is always negative
C. FVA for a transaction is initially zero
D. None of the above

17. Prior to the credit crisis that started in 2007 which of the following was used by derivatives
traders for the discount rate when derivatives were valued
A. The Treasury rate
B. The LIBOR rate
C. The repo rate
D. The overnight indexed swap rate

18. Since the credit crisis that started in 2007 which of the following have derivatives traders used
as the risk-free discount rate for collateralized transactions
A. The Treasury rate
B. The LIBOR rate
C. The repo rate
D. The overnight indexed swap rate

19. Which of the following is true

A. OIS rates are less than the corresponding LIBOR/swap rates
B. OIS rates are greater than corresponding LIBOR/swap rates
C. OIS rates are sometimes greater and sometimes less than LIBOR/swap rates
D. OIS rates are equivalent to one-day LIBOR rates

20. Which of the following is approximately true

A. FVA can be calculated from the initial value of a derivative
B. FVA can be calculated on a transaction-by-transaction basis without considering the
whole portfolio of derivatives a dealer has with a counterparty
C. FVA should theoretically depend on a dealer’s funding cost
D. None of the above