Question #6
Reading: Reading 29 Credit Default Swaps
PDF File: Reading 29 Credit Default Swaps.pdf
Page: 2
Status: Incorrect
Correct Answer: A
Your Answer: A
Question
Considering the two parties to a credit default swaps (CDS), the protection buyer is most likely to be:
Answer Choices:
A. said to be long the reference entity’s credit risk
B. bullish on the financial condition of the reference entity
C. exposed to the credit risk of the protection seller
Explanation
The credit protection buyer is exposed to the credit risk of the CDS seller. (Note that a CDS
does not entirely eliminate credit risk; it eliminates the credit risk of the reference entity
but substitutes it with the credit risk of the CDS seller.) The protection buyer is said to be
short the reference entity's credit risk and is bearish on the financial condition of the
reference entity.