Chapter 7 – Credit Rating Agencies, Exchanges and Clearing and Selement
Q1. Compare the different roles provided to the investor community by credit rating
analysts and sell-side research analysts.
A. Credit rating analysts help investors assess the credit risk of their investment in
debt-related securities. Sell-side analysts have a dual-role, to assess security
Q2. What is the difference between business risk and nancial risk?
A. Financial risk relates to the nancial/accounting policies and capital structure of a
Q3. What are the major criticisms directed at Moody’s, Standard & Poor’s and Fitch?
A. Moody’s and S&P have been strongly criticized for their mistakes in giving high
credit ratings to mortgage backed securities. In particular they misrated CDOs
that were backed by subprime mortgages and had to downgrade almost all of
Q4. How have recent modernizations by the NYSE helped eliminate the problem of front
running?
A. By replacing specialists with Designated Market Makers who do not get rst look
Q5. Why might OTC derivatives be considered more risky than exchange-traded
derivatives?
A. There is counterparty risk with OTC derivatives since there is no exchange acting
Q6. How is derivatives se7lement different from securities se7lement?
A. Se7lement is immediate or within 3 days for securities since trades are spot
trades. For derivatives, since they are structured as future transactions, trades
Q7. What steps have U.S. regulators taken to reduce the systemic risk associated with
OTC derivatives?
A. Regulators require many standard OTC derivative contracts to be cleared through
