Question

52. Benefits of CDS:

A. Hedging interest rate risk, A long positioning vehicle that does not require an initial cash outlay, Access to maturity exposures not available in the cash market

B. Hedging exchange rate risk, A short positioning vehicle that does require an initial cash outlay, Access to maturity exposures not available in the cash market

C. Hedging credit risk, A short positioning vehicle that does not require an initial cash outlay, Access to maturity exposures not available in the cash market

D. None of the above

53. Examples of a Credit Trading strategies:

A. Curve trades: Buy short-dated CDS protection, sell long-dated CDS protection on the same name. High basis risk.

B. Index arbitrage: Buy protection on individual names and sell protection on an index of different names

C. Cross-over: Sell protection on investment grade names and buy protection on non-investment grade names

D. Pair trades: Long one credit and short another that is generically comparable. High basis risk.

54. When investing in Hedge Funds, one needs to know that:

A. Because it does consider skewness, mean-variance analysis is ideal for analysing hedge funds

B. Because it does consider kutosis, mean-variance analysis is ideal for analysing hedge funds

C. Because it does not consider skewness, mean-variance analysis only looks at the good side of hedge funds while ignoring the downside.

D. The mean-variance analysis is ideal for analysing hedge funds

Answer 1

• Benefits of CDS:-Hedging credit risk, A short positioning vehicle that does not require an initial cash outlay, Access to maturity exposures not available in the cash market. CDS works moe like an insurance contract such that the owner of the CDS is safe from credit risk.
• Examples of a Credit Trading strategies: Curve trades: Buy short-dated CDS protection, sell long-dated CDS protection on the same name. High basis risk. Other variants includes Basis Trades and CDS Basket Trades.
• Because it does consider kutosis, mean-variance analysis is ideal for analysing hedge funds