1.Consider a risky zero-coupon bond maturing in one year. At that time the issuer owes USD 100 million. The issuer has no other debt and the bond can be priced using Merton's model. The bond is the only asset of a bank. Which ofthe following statements is correct?
　　A. The amount of risk capital required for this bond by the bank necessarily increases ifthe volatility ofthe assets ofthe issuer increases
　　B. The amount of risk capital required for this bond exhibits a hump shape - it first increases with asset volatility and then falls
　　C. The shape of the relation between the amount of risk capital and asset volatility cannot be determined without knowing the bank's RAROC hurdle rate
　　D. The shape of the relation between the amount of risk capital and asset volatility cannot be determined without knowing the confidence level at which the bank's credit-VaR is calculated
　　2.Which of the following methods of allocating economic capital uses a bottom-up approach?
　　A. Intemal betas method
　　B. Marginal capital method
　　C. Arbitrage pricing theory (APT) method
　　D. Scaling method
　　3.Which of the following is not listed as an International Swaps and Derivatives Association default trigger for payrnent under a credit default swap?
　　A. A downgrade from a ratings agency.
　　B. Bankruptcy.
　　C. Obligation default.
　　D. Failure to Pay.
　　Answer:
　　1.B
　　A is wrong because the price is set at the inception ofthe swap so as to avoid having to poll dealers for the price and does not subject the final price to the volatility inherent after a default. Just because of its simplicity, it is most popular. B is wrong, the higher the correlation of the assets the lower the prices, because when there are highly correlated the probability of any one reference entity defaulting is lower.
　　2.D
　　The scaling method of capital allocation is a bortom-up approach. This method calculates economic capital for a homogeneous portfolio that corresponds to an approprlate business unit.
　　3.A
　　Bankruptcy, obligation default, and failure to pay are listed as default triggers by the International Swaps and Derivatives Association. A downgrade from a ratings agency is not.