Explanation
The CDS rate is approximated by the [Loss given default x Default hazard rate]. Thus Choice 'b' is the correctanswer.
Note that this is also equal to the credit spread on the reference bond over the risk free rate. Therefore credit spreads and CDS rates are generally the same. Also, 'loss given default' is nothing but (1 - Recovery rate). This can besubstituted in the formula for the credit spread to get an alternative expression that directly refers to the recovery rate. Therefore all other choices are incorrect.

Explanation
Pre-settlement risk is the risk that one of the counterparties defaults prior to the date for the maturity of the transaction in question. This may be an unrelated default, in fact there may have been no default on that particular contract, but the party may have defaulted on its other obligations, or filed for bankruptcy. To deal with such cases and to protect the interests of both the parties, it is common toprovide for immediate termination of positions and settlement based on the current replacement value of the contracts. Therefore statements I and II are correct.
Statement III is correct as well - the exposure from an OTC derivative contract derives fromits current replacement value, and not the notional. If the current replacement value is negative, then the credit exposure is considered equal to zero.
Statement IV is correct as it is quite common to restate all exposures - those from credit lines, OTC derivatives etc - in loan equivalent terms prior to estimating credit risk.

Explanation
The capital adequacy ratio, also called the minimum capital requirement for credit risk per Basel II is 8% of riskweighted assets. The other choices are incorrect.

Explanation
A cumulative accuracy plot measures the accuracy of credit ratings assigned by rating agencies by considering the relative rankings of obligors according to the ratings given. Choice 'd' is the correct answer.

Explanation
One way to think about this question is this: we are provided with two pieces of information: if the portfolio is worth $100 to start with, it will be worth $95 at the end of year 1 and $85 at the end of year 2. What it isasking for is the probability of default in year 2, for the debts that have survived year 1. This probability is $10/$95 =
10.53%. Choice 'b' is the correct answer.
Note that marginal probabilities of default are the probabilities for default for a given period, conditional on survival till the end of the previous period. Cumulative probabilities of default are probabilities of default by a point in time, regardless of when the default occurs. If the marginal probabilities of default for periods 1, 2... n are p1, p2...pn, then cumulative probability of default can be calculated as Cn = 1 - (1 - p1)(1-p2)...(1-pn). For this question, we can calculate the probability of default for year 2 as [1 - (1 - 5%)(1 - 10.53%)] = 15%.