Explanation:
Let's analyze each statement about CDS settlement:
Option A: Cash settlement is more common than physical settlement. - INCORRECT. Physical settlement is actually more common in practice, where the protection buyer delivers the defaulted bonds to the protection seller in exchange for the notional amount.
Option B: The actual recovery rate is typically determined close to the payoff date of the CDS. - CORRECT. The recovery rate is determined through an auction process that occurs after a credit event is declared, typically close to the settlement date.
Option C: Settlement typically occurs the business day following the declaration of a credit event. - INCORRECT. Settlement does not occur immediately; there is typically a process involving auctions and documentation that takes several weeks after a credit event is declared.
Therefore, option B is the most accurate statement.
Ultimate access to all questions.
Which of the following statements is most accurate with respect to the settlement of CDS?
A
Cash settlement is more common than physical settlement.
B
The actual recovery rate is typically determined close to the payoff date of the CDS.
C
Settlement typically occurs the business day following the declaration of a credit event.
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