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Answer: the protection buyer assumes counterparty risk with respect to the protection seller.
## Explanation Let's analyze each option: **Option A: CORRECT** - The protection buyer does assume counterparty risk with respect to the protection seller. If the protection seller defaults and cannot make the required payment when a credit event occurs, the protection buyer suffers a loss. **Option B: INCORRECT** - The protection buyer makes a series of periodic, **fixed** payments (CDS spread) to the protection seller, not variable payments. **Option C: INCORRECT** - While CDS provides credit protection, the change in value of the CDS contract does not necessarily fully offset the change in the value of the underlying, especially when considering basis risk and other factors. Therefore, option A is the correct statement.
Author: LeetQuiz Editorial Team
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With respect to CDS:
A
the protection buyer assumes counterparty risk with respect to the protection seller.
B
the protection buyer makes a series of periodic, variable payments to the protection seller.
C
the change in value of the CDS contract fully offsets the change in the value of the underlying.
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