Answer-first summary for fast verification
Answer: Default risk of the counterparty
When an institution purchases protection in a credit default swap (CDS), it is transferring the default risk of the underlying asset to the protection seller (counterparty). However, this creates a new risk exposure - the counterparty risk of the protection seller. If the protection seller defaults, the protection buyer may not receive the promised payment when the underlying asset defaults. Therefore, the institution has exchanged the default risk of the underlying asset for the default risk of the counterparty. **Key points:** - CDS protection buyer transfers underlying asset default risk - But gains counterparty default risk - This is counterparty risk substitution - The correct answer is A: Default risk of the counterparty
Author: LeetQuiz .
Ultimate access to all questions.
When an institution has sold exposure to another institution (i.e., purchased protection) in a CDS, it has exchanged the risk of default on the underlying asset for which of the following?
A
Default risk of the counterparty
B
Default risk of a credit exposure identified by the counterparty
C
Joint risk of default by the counterparty and of the credit exposure identified by the counterparty
D
Joint risk of default by the counterparty and the underlying asset
No comments yet.