New SIDBI Grade A New Batch Starts on Nov 18

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    Question

    Read the following passage and answer the next 3 question    The subprime mortgage crisis, popularly known as the “mortgage mess” or “mortgage meltdown,” came to the public’s attention when a steep rise in home foreclosures in 2006 spiralled seemingly out of control in 2007, triggering a national financial crisis that went global within the year. Consumer spending went down, the housing market plummeted, foreclosure numbers continued to rise and the stock market was shaken. The subprime crisis and resulting foreclosure fallout caused dissension among consumers, lenders and legislators and spawned furious debate over the causes and possible fixes of the “mess.” The financial crisis of 2008, began in 2007 with a crisis in the subprime mortgage market in the US. The main reason was a high default rate in the United States subprime home mortgage sector. The expansion of this sector was encouraged by the Community Reinvestment Act (CRA) a US federal law designed to help low- and moderate-income Americans get mortgage loans. Many of these subprime loans were then bundled and sold. Many of these loans were also bundled together and formed into new financial instruments called MBS, which could be sold as (ostensibly) low-risk securities.

    Foreign Portfolio Investors (FPIs) are eligible to be categorized as non-retail users and have been allowed to buy and sell CDS (Credit default Swaps) protection under the Credit Derivatives Directions by RBI. The aggregate limit of the notional amount of CDS sold by FPIs shall be _____.

    A 5% of the outstanding stock of corporate bonds Correct Answer Incorrect Answer
    B 10% of the outstanding stock of corporate bonds Correct Answer Incorrect Answer
    C 15% of the outstanding stock of corporate bonds Correct Answer Incorrect Answer
    D 25% of the outstanding stock of corporate bonds Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    Solution

    Foreign Portfolio Investors (FPIs) are eligible to be categorised as non-retail users and have been allowed to buy and sell CDS protection under the Credit Derivatives Directions. Necessary Directions to Authorised Persons that are eligible to deal with FPIs for transacting in Credit Derivatives in terms of the Credit Derivatives Directions are being issued hereunder: 1.    Selling of CDS protection by all FPIs shall be subject to an aggregate limit specified by the Reserve Bank. The aggregate limit of the notional amount of CDS sold by FPIs shall be 5% of the outstanding stock of corporate bonds 2.    FPIs shall not sell any CDS protection once the aggregate limit is utilized. The limit utilized for CDS protection sold by the FPI shall be released upon the exit of the CDS position by the FPIs

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