Question: David says that CDS is essentially the same as buying default insurance on the risky corporate bond, where the buyer pays for the default protection

David says that “CDS is essentially the same as buying default insurance on the risky corporate bond, where the buyer pays for the default protection and the seller sells the protection.” Thus he concludes that CDS is the same as other insurance. Comment on David’s conclusion.

Step by Step Solution

★★★★★

3.48 Rating (168 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

There are two big differences between a CDS and insurance First the risk attached to regular insuran... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

413-B-A-S-E (824).docx

120 KBs Word File

Students Have Also Explored These Related Accounting Questions!

David Sharma sells masks, textiles, and other goods imported from Africa. David usually marks up his purchases by 300% (that is, if he pays $10 for an item, he lists it at $40). His annual sales...

The buyer contracted with the seller for the purchase of ribs. After delivery, the buyer refused to pay the contract price, claiming that the ribs arrived in an "off condition." The seller fi led...

David is leaving on a three-day business trip. He has a meal allowance of $60. Let's use X to stand for the amount he spends on food the first day, Y for the amount he spends the second day, and Z...

Hi, I have a few questions to ask: 1.Consider the cash flow pattern of the CDS in Exhibit 2. One way to think about a credit default swap is that its cash flows can be replicated with long and short...

1) What is a credit default swap (CDS)? Consider the cash-flow pattern of the CDS in Exhibit 2 ofFrom free lunch to black hole: Credit Default Swaps at AIG. Can you set up a trading strategy using...

Hi, I am doing a project for derivatives class and I have some questions about a regression and Monte Carlo simulation that I need to come up with. So the goal is to hedge against CDS instruments by...

Credit default swaps are a portfolio management tool that gained notoriety during the peak of the 2008 financial crisis. These derivative investments are bit more complex than stocks, mutual funds or...

Create a Death Bond Diagram PROFITING FROM MORTALITY By: Goldstein, Matthew, Business Week, 7/30/2007, Issue 40-44 Death bends may be the most macabre investment scheme ever devised by Wall Street In...

Evaluate the potential gains and losses for forwards,future,call options,put options and swaps. Outline and describe the different risks that each type of derivative contract faces. Describe...

Questions for "An Other Scary Show About Economy" CDS 1. What is CDS? 2. CDS is an insurance policy. What kind of risk is under the insurance? How does it work? 3. What role does the seller of the...

One year ago, the 30-year U.S. Treasury Bond with a coupon of 2% had a yield of 1.95% and the 2-year U.S. Treasury Note with a coupon of 0.125% had a yield of 0.2%. (data as of August 18, 2021)....

You are the audit manager on the current year audit of Black & White Inc. (B&W). The audit staff's field work for the B&W was completed on February 26, 2020. You are reviewing the working...

How is the department of education using technology to support development and public service delivery

Should all researchers have a theory in mind before they conduct their research? LO1.6

What patterns have been observed in the types of firms going public in the United States? Why do you think that certain industries become popular with investors at different times?

What are the principal benefits of going public? What are the key drawbacks?

Distinguish between an equity carve-out and a spin-off. How might a spin-off create value for share-holders?

An investor is in the 28% federal tax bracket, pays an 9% state tax rate and 4% in local income taxes. For this investor a municipal bond paying 7% interest is equivalent to a corporate bond paying...

Orlando has outgrown its Citrus Bowl stadium and has not been invited to host the best of College Football Championship games because of it. If a public works project (a very long term commitment)...

Do not edit the main.py file. I only need to work on the hill_climbing.py file. Modify so that it does hill climbing with random restarts and simulated annealing. Modify it to the below-mentioned...