Register
24:00
Stop
CFA Level 2 - Quantitative Methods - Basics of Multiple Regression and Underlying Assumptions
Intermediate
1/24
Investor A purchases a 5-year credit default swap (CDS) on a $10 million corporate bond issued by Company XYZ. The annual CDS premium is 150 basis points. Two years later, Company XYZ's credit quality improves, and the market CDS premium for similar bonds decreases to 75 basis points. Which of the following best describes the impact on the value of Investor A's CDS position?
a.
The value of Investor A's CDS position has increased, as Investor A can now sell protection at a higher premium than the original contractual premium, benefiting from the improved credit quality of Company XYZ and the resulting lower market CDS premium.
b.
The value of Investor A's CDS position remains unchanged, as the contractual CDS premium is fixed for the duration of the contract, regardless of changes in market conditions.
c.
The value of Investor A's CDS position has decreased, as the reduced credit risk of Company XYZ has led to a lower market CDS premium.
Intermediate