Financial Risk Manager Part 2
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An investor purchases $1 million of Canadian bonds and is concerned about the bonds defaulting. The investor wishes to transfer this default risk to a third party, so he enters a fixed credit default swap (CDS) spread agreement with First Bank. Assume that the recovery rate is zero and that there is no accrued interest in the event that Canada defaults. Which of the following statements about the CDS between the investor and First Bank is correct?
An investor purchases $1 million of Canadian bonds and is concerned about the bonds defaulting. The investor wishes to transfer this default risk to a third party, so he enters a fixed credit default swap (CDS) spread agreement with First Bank. Assume that the recovery rate is zero and that there is no accrued interest in the event that Canada defaults. Which of the following statements about the CDS between the investor and First Bank is correct?
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A paper loss occurs for the investor if the correlation risk between First Bank and Canada increases because the value of the CDS spread will increase.
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