A CDS works the same way as an insurance on default True False If an equity...

A CDS works the same way as an insurance on default

True

False

If an equity swap is signed at time 0, promising to exchange a fixed rate against the gains of the Dow Jones index, and the index starts falling, the value of the swap ______ (decreases/increases) for the investor who promised to pay the fixed rate.

Expert Solution

This is a true statement.

A CDS contract can be used as a hedge or insurance policy against the default of a bond or loan. An individual or company that is exposed to a lot of credit risk can shift some of that risk by buying protection in a CDS contract.

The value of the swap is : as we are

Paying Fixed Interest Rate, Receiving Return on Equity

As the investor who promises to pay a fixed rate and receive the rate of return from the Index and the Index starts falling. So, in such a case he will exchange a fixed payment for a variable payment which he will receive less from now. So, the value of the swap will decrease.

the correct option is DECREASE.

jeff jeffy answered 2 years ago

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