2016-FRR Exam Results

The pricing of credit default swaps (CDS) is primarily influenced by:

Probability of Default:The likelihood that the underlying entity will default on its obligations.

Duration:The term or maturity of the CDS contract.

Loss Given Default:The expected loss if the underlying entity defaults.

Market spreads, while relevant to bond pricing and other instruments, are not a direct factor in the calculation of the pricing of CDS contracts.

References

Verified information on CDS pricing factors from the document ​

In the United States, foreign exchange derivative transactions typically occur between a few large internationally active banks. These banks are major players in the foreign exchange markets and often act as intermediaries, providing liquidity and managing risks for themselves and their clients. The concentration of these transactions among a few large banks leads to a concentration of risks within these institutions.

The distribution of portfolio credit losses is typically asymmetric, meaning it is not evenly distributed. This asymmetry arises because the likelihood of small losses is much higher than the likelihood of very large losses.

The likelihood of total losses, which includes both expected and unexpected losses, is greater than the likelihood of no credit losses. This is because while small losses happen more frequently, large losses, although less frequent, can occur and can be significant.

By foreign exchange market convention, spot foreign exchange transactions are typically settled on a T+2 basis, meaning the transactions are exchanged at the spot date based on the two-day rule. This means that the delivery of the currencies involved in the transaction takes place two business days after the trade date. This standard settlement period is used to ensure that there is enough time to manage the administrative tasks associated with the transaction.