CFA Level I · CFA Level I Exam · Forward Commitment and Contingent Claim Features and Instruments
In a single-name credit default swap, the credit protection buyer is most likely:
The protection buyer is short the credit risk of the reference entity. It pays a periodic premium and receives compensation if a credit event occurs, so it benefits when the reference entity's credit quality deteriorates. The protection seller is the party that is long credit risk.
- Ashort the credit risk of the reference entityCorrect
- Blong the credit risk of the reference entity
- Cobligated to deliver the reference obligation at inception
Explanation
The protection buyer pays periodic premiums and receives a payment if a credit event occurs, so the position gains when credit quality deteriorates. That is economically a short position in the credit risk of the reference entity. The seller is the one who is long credit risk.
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