1. Main reason Credit Default Swaps (CDS) are different from ordinary insurance because
A) It insures different classes of assets
B) CDS are traded over-the-counter
C) Seller of CDS is required to set aside reserves to cover potential losses
D) There are numerous regulations that apply to trading CDS
2. Naked CDS creates severe moral hazard problems because
A) Seller of CDS has no incentives to check the quality of the asset it insures
B) Seller of CDS may not act in the best interest of the holder of CDS
C) Owner of the asset that CDS insures has no incentives to check the quality of the asset
D) Holder of CDS and owner of the asset CDS insures may not be the same entity
Credit Default Swaps:
Credit default swap is one of the financial swaps whereby swap seller agrees to compensate buyer when a case of debt default occurs.
Answer and Explanation:
The answer is B.
The answer is D.
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fromChapter 1 / Lesson 4
In this lesson, you will explore the various types of risks faced by a business and understand how financial risk is different from other types of risks. Then, you will learn about the different types of financial risks and methods to manage them.