Ultimate access to all questions.
Explanation:
Option A is the false statement. For a firm with a stable, low default probability, the CDS spread curve is typically upward sloping. This is due to the inherent uncertainty and risk premium associated with longer time horizons, meaning longer maturities will demand higher spreads. Downward-sloping curves generally indicate near-term distress.
No comments yet.
308.3. According to Malz,³² each of the following is true about the CDS spread curve and spread risk EXCEPT, which is not?
A
If the market believes that a firm has a stable, low default probability that is unlikely to change for the foreseeable future, the firm's spread curve will be flat or more likely downward sloping to reflect diminishing marginal default probabilities
B
Downward-sloping spread curves are unusual, a sign that the market views a credit as distressed, but they did become prevalent during the subprime crisis.
C
If the CDS spread increases, the premium paid by the fixed-leg counterparty increases. This causes a gain to existing fixed-leg payers, who, in retrospect, got into their positions cheap
D
A common measure of spread risk is spread volatility ("spread vol"): the historical or expected standard deviation of changes in spread, often measured in basis points per day