CMFAS CM-SIP Swaps & Other OTC Derivatives question: single-name credit default swap

CMFAS CM-SIPSwaps & Other OTC Derivatives

In a single-name credit default swap, the "reference entity" is:

A the borrower whose credit event triggers the protection payment
B the party that buys protection and pays the periodic premium
C the central clearing house that guarantees the trade
D the currency in which the CDS notional is denominated

Show the answer and explanation

Answer: A. the borrower whose credit event triggers the protection payment

The reference entity is the issuer/borrower whose credit event the CDS is written on; if it defaults, the protection seller pays the buyer. The buyer and seller are the counterparties, not the reference entity.

Common mistake

Do not confuse the reference entity (the borrower being insured) with the protection buyer or the clearing house.

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CMFAS CM-SIP Swaps & Other OTC Derivatives question: single-name credit default swap

Answer: A. the borrower whose credit event triggers the protection payment

Common mistake

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CMFAS CM-SIP Swaps & Other OTC Derivatives question: single-name credit default swap

Answer: A. the borrower whose credit event triggers the protection payment

Common mistake

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