1.Which of the following statements regarding lending and counterparty risk is true?
　　A. Counterparty risk is defined as the possibility that an obligator will default on an outstanding loan.
　　B. Lending risk is defined as the possibility that either party to a derivative transaction will fail to meet its obligations.
　　C. Counterparty risk is very different from and more complex than lending risk.
　　D. Counterparty risk and lending risk are the same.
　　2.Which of the following statements is incorrect regarding volatility smiles?
　　A. Currency options exhibit volatility smiles because the at-the-money options have higher implied volatility than away-from-the-money options.
　　B. Volatility frowns result when jumps occur in asset prices.
　　C. Equity options exhibit a volatility smirk because low strike price options have greater implied volatility.
　　D. Relative to currency traders, it appears that equity traders' expectations of extreme price movements are more asymmetric.
　　3.Jemis Fund Management Inc. (Jemis) is a mutual fund company that frequently trades interest rate swaps. One Of the swaps currently outstanding has a net present value (NPV) of $2 million in Jemis favor. According to Jemis, the $2 million represents its potential loss in the event of the counterparty's default. Which ofthe following terms best describes this amount?
　　A. Exposure at default.
　　B. Recovery.
　　C. Expected loss.
　　D. Loss given default.
　　Answer:
　　1.C
　　Counterparty risk is very different from and more complex than lending risk. Counterparty risk isdefined as the possibility that either party to a derivative transaction will fail to meet its obligations. Lending risk is defined as the possibility that an obligator wiIl default on an outstanding loan.
　　2.A
　　Currency options exhibit volatility smiles because the at-the-money options have lower implied
　　volatility than away-from-the-money options.
　　Equity traders believe that the probability oflarge price decreases is greater than the probability of
　　large price increases. Currency traders' beliefs about volatility are more symmetric as there is no
　　large skew in the distribution of expected currency values.
　　3.A
　　Exposure at default is the potential amount lenders would lose in the event of a borrower's default.Exposure for interest rate swaps is the NPV ofthe swap. Loss given default (LGD) is the amount of creditor loss in the event that a default does occur, and is calculated as the exposure lessrecovery. The fraction of exposure not list at default is rccovery. Expected loss is the expected value ofthe credit loss, and is a factor ofthe probability of default and LGD.