Explanation
Interest rate caps are effectively call options on an underlying interest rate that protect the buyer of the cap against a rise in interest rates over the agreed exercise rate. As with options, the premium on the cap depends upon the volatility of the underlying rates as one of its variables. A floor is the exact opposite of a cap, ie it is effectively a put option on an underlying interest rate that protects the buyer of the floor against a fall in interest rates below the agreed exercise rate.
A cap protects a borrower against a rise in interest rates beyond a point, and a floor protects a lender against a fall in interest rates below a point.
A collar is a combination of a long cap and a short floor, the idea being that the premium due on the cap is offset partly by the premium earned on the short floor position. Therefore a collar is less expensive than a cap or a floor.
Caps, floors and collars provide a hedge against interest rate risks, but do not protect against changes in credit spreads unless the reference rate already includes the spread (eg, by reference to the corporate bond rate), and they certainly do not have anything to do with gamma risk. Therefore Choice 'c' is the correct answer.

Explanation
https://riskprep.com/images/stories/questions/102.07.a.png is the coefficient of risk aversion at x. Its inverse, ie https://riskprep.com/images/stories/questions/102.07.b.png, is called the coefficient of risk tolerance.


Risk aversion or risk tolerance is indicated in a utility function by its curvature. A concave utility function indicates risk aversion and a convex function indicates risk tolerance. The curvature is measured as a ratio of the second derivative to the first derivative of a function. A negative second derivative implies concavity. The expression - is the coefficient of risk aversion, and its inverse, which is in the same units as wealth, is called the coefficient of risk tolerance.

Explanation
This question touches upon a couple of issues that relate to hedging foreign exchange exposures using futures contracts. Firstly, many futures contracts on exchanges are available only at specific maturity dates, for example, the IMM dates. They may or may not coincide with actual liabilities for a running business. Also, futures contracts are standardized, ie their notional amounts are fixed rounded sums, and they can only be traded in whole numbers. This often means business using futures for hedging end up having a close enough, but not perfect hedge.
For our importer in the question, clearly he has to buy USDs so he can make his payment. Since each contract gives him USD 100k, he should buy 11 contracts that will get him very close to the amount he finally needs.
Also, the contract expires a month later than his liability is due. This means he should offset the contract by closing it out in August soon as he has made his payment. This will allow him to stay hedged till August. If he does not sell out of the contracts, he will become exposed to a long position for one month till the contract settles, a risk which is unnecessary for him.
Therefore Choice 'b' is the best answer.

Explanation
According to ISDA, a credit event is an event linked to the deteriorating credit worthiness of an underlying reference entity in a credit derivative. The occurrence of a credit event usually triggers full or partial termination of the transaction and a payment from protection seller to protection buyer. Credit events include
- bankruptcy,
- failure to pay,
- restructuring,
- obligation acceleration,
- obligation default and
- repudiation/moratorium.
Therefore all four events listed are credit events and Choice 'b' is the correct answer.

Explanation
Remember the four basic axioms underlying the principal of maximum expected utility:
- Transitivity, ie if A is preferred over B, and B is preferred over C, then A must be preferred over C;
- Continuity, ie if A is preferred over B, and B is preferred over C, then B is on a continuum between A and C such that we can be indifferent between receiving B, or a lottery offering either A or C with probabilities p &
1-p respectively.
- Independence, ie choices are not affected by the way they are presented
- Stochastic dominance, ie a gamble that offers a greater probability of a preferred out come will be preferred.
In this case, the first axiom is being violated. Therefore Choice 'c' is the correct answer.