CFA Level I · CFA Level I Exam · Forward Commitment and Contingent Claim Features and Instruments
Which of the following events most likely qualifies as a credit event that triggers a payout under a standard credit default swap on a corporate reference entity?
A failure to make a scheduled payment after any grace period is a credit event. Standard CDS credit events are bankruptcy, failure to pay and restructuring. Rating downgrades and share price declines may widen the CDS spread but do not trigger a payout.
- AA downgrade of the entity's credit rating by one notch
- BA failure to make a scheduled payment on the reference obligation after any grace periodCorrect
- CA decline in the entity's share price of more than 30%
Explanation
Standard credit events include bankruptcy, failure to pay, and restructuring. A missed payment after the grace period is a failure to pay. Rating downgrades and share price falls are market signals that can raise CDS spreads, but they do not trigger settlement.
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