Question #3
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 strategies would be most appropriate use of CDS given an expectation of credit curve steepening?
Answer Choices:
A. A curve flattening trade
B. A curve steepening trade
Explanation
A credit curve steepening expectation would entail the credit spread for longer maturities
increasing relative to the change in credit spread for shorter maturities. In such a scenario,
one would buy protection for longer maturities and sell protection for shorter maturity
(i.e., a curve steepening trade).