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PRMIA Exam 8010 Topic 1 Question 7 Discussion

Actual exam question for PRMIA's Operational Risk Manager (ORM) Exam exam
Question #: 7
Topic #: 1
[All Operational Risk Manager (ORM) Exam 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.

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