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PRMIA 8010 Exam - Topic 1 Question 7 Discussion

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?
C) The replacement value of the swap
A) $100m
B) $6m
D) $0, as all payments on the swap are current

PRMIA 8010 Exam - Topic 1 Question 7 Discussion

Actual exam question for PRMIA's 8010 exam
Question #: 7
Topic #: 1
[All 8010 Questions]

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?

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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
10 months ago
Definitely not $100m, that's just the notional value.
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Verlene
10 months ago
I think it's $0 since they were up to date on payments.
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Sharmaine
10 months ago
Wait, how can they claim that if the payments were current?
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Sueann
10 months ago
Totally agree, it's all about the replacement value!
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Art
10 months ago
The investor has a claim for the replacement value of the swap.
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Alise
11 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
11 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
11 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
11 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
11 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
11 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
11 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
11 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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