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QUESTION 2 A credit forward is a forward agreement that hedges against a decrease in default...

QUESTION 2

A credit forward is a forward agreement that

hedges against a decrease in default risk on a loan after the loan rate is determined and the loan issued.

hedges against an increase in default risk on a loan before the loan rate is determined and the loan issued.

hedges against an increase in default risk on a loan after the loan rate is determined and the loan issued.

hedges against a decrease in default risk on a loan before the loan rate is determined and the loan issued.

hedges against an increase in default risk on a loan after the loan rate is determined and before the loan is issued.
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Answer #1

A credit forward is a credit derivative which constitutes a forward contract on a credit spread. More specifically, it is a single-period OTC (over the counter) contract whose payoff is based on the difference between an agreed credit spread (or price) and the terminal credit spread (price) of a credit-risky debt reference.

This contract provides a hedge against an increase in default risk on a debt issue (i.e., the decline in credit quality of an issuer) after the interest rate is set and the debt has been issued. So the last option in the list is your answer

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