PRMIA 8010 Exam - Topic 1 Question 7 Discussion

Actual exam question for PRMIA's 8010 exam

Question #: 7
Topic #: 1

An investor enters into a 5-year total return swap with Bank A, with the investor paying a fixed rate of 6% annually on a notional value of $100m to the bank and receiving the returns of the S&P500 index with an identical notional value. The swap is reset monthly, ie the payments are exchanged monthly. On Jan 1 of the fourth year, after settling the last month's payments, the bank enters bankruptcy. What is the legal claim that the hedge fund has against the bank in the bankruptcy court?

A$100m

B$6m

CThe replacement value of the swap

D$0, as all payments on the swap are current

Show Suggested Answer

Suggested Answer: C

According to ISDA standard definitions, the legal claim for OTC derivatives is the current replacement value of the contract. Therefore Choice 'c' is the correct answer. None of the other choices are correct.

by Alex at May 06, 2022, 09:08 AM

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Nguyet

6 months ago

Definitely not $100m, that's just the notional value.

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Verlene

6 months ago

I think it's $0 since they were up to date on payments.

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Sharmaine

6 months ago

Wait, how can they claim that if the payments were current?

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Sueann

6 months ago

Totally agree, it's all about the replacement value!

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Art

6 months ago

The investor has a claim for the replacement value of the swap.

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Alise

7 months ago

I’m a bit confused about the fixed payments. If they’re all settled, does that mean the hedge fund has no claim? I need to double-check that.

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Novella

7 months ago

I feel like we went over this in class. The hedge fund should be entitled to the replacement value of the swap, right?

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Jess

7 months ago

I’m not entirely sure, but I think if the payments are current, the claim could be $0. That sounds familiar from our practice questions.

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Mendy

7 months ago

I remember discussing how the legal claims in bankruptcy can depend on the net position of the swap. I think the hedge fund might claim the replacement value.

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Adelle

7 months ago

Hmm, I'm not sure. I'll need to review my notes on mobile testing approaches to decide which one is the best fit here.

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Denise

7 months ago

Hmm, I'm not totally sure about this one. I'm debating between Environment Planning and Policies Planning. I'll have to think it through carefully.

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Ilona

7 months ago

I think I read something about the structure of coverage affecting costs, but I'm not clear on how it connects to other characteristics.

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Felix

7 months ago

Hmm, I'm not sure I fully understand what this is asking. The wording is a bit unclear to me. I'll have to think it through step-by-step.

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