GARP Updated 2016-FRR Exam Questions and Answers by ianis

Credit derivatives historically carry several specific types of risk:

Documentation Risk: The risk arising from the complexity and potential ambiguity in the legal documentation of credit derivative contracts.

Definition of Credit Events: The risk associated with the precise definition of what constitutes a credit event, such as a default, which can be subject to interpretation and affect payouts.

Occurrence of Credit Events: The actual risk that a credit event will occur, triggering the derivative contract.

Enterprise risk is a broader category that typically includes all risks faced by an enterprise, not just those associated with credit derivatives.

References

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Chooser options give the holder the flexibility to decide whether the option will be a call or a put at a specific future date. This feature makes chooser options valuable in uncertain market conditions, as the holder can choose the type of option that will be more beneficial depending on the market scenario at the decision point.

Delta is the most commonly used risk measure to determine the number of options needed to hedge an underlying position. Delta measures the sensitivity of the option's price to changes in the price of the underlying asset. A delta-neutral portfolio, where the total delta is zero, effectively hedges against small movements in the underlying asset's price. Thus, risk managers frequently adjust their hedging strategies based on the delta of their positions.

Market-linked credit risk drivers often face specific disadvantages:

Need to supply a large number of input parameters to the model: Complex models require numerous data inputs, which can be challenging to obtain and maintain.

Slow computation speed due to higher simulation complexity: The complexity of these models can lead to slower computation times, making them less efficient for real-time analysis.

Non-linear nature of models and the need to estimate unknown variables are also relevant but are not as primary disadvantages as the first two mentioned.

References

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