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As sales manager for the treasury department of an insurance company, you are preparing a presentation...

As sales manager for the treasury department of an insurance company, you are preparing a presentation to a fundsmanager on the structure of the credit default swap product your company sells to the market.

Required:Explain the purpose and structure of a credit default swap.

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Answer #2

The purpose of a credit default swap is to provide protection to the protection buyer in times of default by the protection seller.

The structure of CDS is that the protection buyer will pay a series of monthly payments to the protection seller. Suppose the notional principal is $50 milion , the protection buyer will pay 100 bps of $50 million every year. In case no event arises the protection buyer will keep paying the yearly payments without any compesation amount paid . In case the event occurs, the protection buyer will be paid the compensation amount either through cash or physical payment.

answered by: anonymous
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