Question #2
Reading: Reading 29 Credit Default Swaps
PDF File: Reading 29 Credit Default Swaps.pdf
Page: 1
Status: Correct
Correct Answer: B
Question
Which of the following statements about credit default swaps (CDS) is least accurate? A credit default swap's reference obligation is:
Answer Choices:
A. typically a senior unsecured bond
B. the only obligation of the reference entity covered by a single-name CDS
C. delivered by the protection buyer to the protection seller, upon default, in the case of physical settlement
Explanation
The reference obligation is not the only instrument covered by the CDS: any debt
obligation issued by the borrower that is ranked equivalently ("pari passu") in priority of
claims, or higher, relative to the reference obligation, is covered. A CDS's reference
obligation is typically a senior unsecured bond. In the case of physical settlement, the
reference obligation is delivered by the protection buyer to the protection seller, in
exchange for the CDS notional.