CFA Level I · CFA Level I Exam · Forward Commitment and Contingent Claim Features and Instruments
Compared with a single-name CDS, an index CDS referencing a basket of 125 equally weighted issuers will most likely:
An index CDS pays out only on the defaulted constituent's share of the notional. With 125 equally weighted issuers, one default affects 1/125 of the notional, and the contract continues on the remaining names with a reduced notional.
- Asettle in full if any one constituent defaults
- Bpay out only for the defaulted constituent's share of the notionalCorrect
- Cterminate for all constituents once the first credit event occurs
Explanation
In an index CDS, a credit event on one constituent leads to a payout on that constituent's weight, here 1/125 of the notional. The contract continues with a reduced notional on the remaining names. Full settlement or termination would overstate the exposure.
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