In recent years, there has been quite a buzz about credit default swaps. The turn of events following the 2008 Global Financial crisis became a test of the systems that settle credit default swaps.

1. Define credit default swaps (CDS) and why they are necessary. (8 Marks)

 

2. What are the advantages and disadvantages of CDS? (10 Marks)

3. Walvis Corporation has invested R75m in bonds issued by Mashava Oil Exploration. Walvis is somehow worried that Mashava Oil Exploration may be facing a financial crisis. Therefore, Walvis buys R75m worth of CDS protection on Mashava Oil Exploration debt for two years from Gweru Investment Bank at a premium of 250 bps (2.5%) per annum. Explain scenarios of default and no default. (12 Marks)

 

Answer rating: 100% (QA)

ANSWER IS Credit default swaps CDS are financial derivatives that act as insurance contracts to protect against the risk of default on a specific debt obligation They are essentially agreements betwee... View the full answer