1. If a bank acts as a market maker between two counterparties in swaps transactions (earning a spread), is it subject to credit risk when it has two offsetting swaps contracts? Explain.
2. Is the Black-Scholes-Merton options pricing model well suited to pricing an American call option on a dividend paying stock?
3. Describe the key differences between SOFR and LIBOR.
4. Some market participants say that convertible bonds are “debt when you want them to be equity, and equity when you want them to be debt”. Explain why this would be the case.
5. A bank offers their customers a one-year investment that pays out the return of the FTSE100 index if the FTSE is up 5% or more, but their total return is capped at 15%. If the FTSE100 is down, or up by less than 5%, the customer will get their initial investment back in full. How might such an investment product be structured? Why might it be difficult to issue such a product in today’s market environment?
200-300 words each for Question 1 to Question 4
400 words for question 5
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