Question: State whether it is TRUE or FALSE (2 marks), and EXPLAIN the reason (3 marks). A speculator has bought a 5-year single-name Credit Default Swap

State whether it is TRUE or FALSE (2 marks), and EXPLAIN the reason (3 marks).

A speculator has bought a 5-year single-name Credit Default Swap (CDS) on a reference entity in which the speculator is the party paying the periodic spread. Since buying the CDS, the creditworthiness of the reference entity has improved, and the likelihood of default by the reference entity has decreased. The speculator will therefore make a mark-to-market gain on the CDS.

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