1. In a CDS contract, the party that agrees to make a series of fixed periodic payments to the counterparty over the contract term in return for a promise to be compensated by the counterparty in case of default is best known as:
A. the credit protection buyer.
B. the credit protection seller.
C. an option seller.
2. A company files for bankruptcy, triggering CDS contracts. It has two series of senior bonds outstanding: Bond P, which is trading at 40% of par, and Bond Q, which is trading at 50% of par. The recovery rate for both CDS contracts is closest to:
3. Angela owns some bonds issued by Alcarta Corp. She has become concerned about a default in the long-run but is not worried about default in the short-term. Alcarta’s two-year CDS trades at 300 bps, and the five-year CDS trades at 500 bps. Which of the following curve trades would best hedge her risk?
A .Going short (buying protection) in the five-year CDS, and going long (selling protection) in the two-year CDS.
B. Going long (selling protection) in the five-year CDS, and going short (buying protection) in the two-year CDS.
C. Going short in the five-year CDS, while taking no position in the two-year CDS.