RSK4804 Assignment 2 2025
Unique Number: 865771
Due date: 30 August 2025
QUESTION 1
a.
Credit default swaps are necessary because they allow investors to manage credit risk.
Specifically, CDS contracts act as insurance against default on debt instruments like
corporate or government bonds. If a borrower defaults, the CDS seller compensates the
buyer for the loss, thus providing protection against credit events such as bankruptcy or
restructuring.
b. Some investors are not in favour of CDS because:
They can amplify systemic risk, as seen during the 2008 Global Financial Crisis,
when defaults triggered large-scale payouts and counterparty failures.
CDS can encourage speculation rather than protection, as investors may buy CDS on
bonds they do not own, effectively betting on a company’s failure (this is known as a
naked CDS), which can create market instability.
DISCLAIMER & TERMS OF USE
Educational Aid: These study notes are intended to be used as educational resources and should not be seen as a
replacement for individual research, critical analysis, or professional consultation. Students are encouraged to perform
their own research and seek advice from their instructors or academic advisors for specific assignment guidelines.
Personal Responsibility: While every effort has been made to ensure the accuracy and reliability of the information in
these study notes, the seller does not guarantee the completeness or correctness of all content. The buyer is
responsible for verifying the accuracy of the information and exercising their own judgment when applying it to their
assignments.
Academic Integrity: It is essential for students to maintain academic integrity and follow their institution's policies
regarding plagiarism, citation, and referencing. These study notes should be used as learning tools and sources of
inspiration. Any direct reproduction of the content without proper citation and acknowledgment may be considered
academic misconduct.
Limited Liability: The seller shall not be liable for any direct or indirect damages, losses, or consequences arising from
the use of these notes. This includes, but is not limited to, poor academic performance, penalties, or any other negative
consequences resulting from the application or misuse of the information provided.
, For additional support +27 81 278 3372
QUESTION 1
a.
Credit default swaps are necessary because they allow investors to manage credit
risk. Specifically, CDS contracts act as insurance against default on debt instruments
like corporate or government bonds. If a borrower defaults, the CDS seller
compensates the buyer for the loss, thus providing protection against credit events
such as bankruptcy or restructuring.
b. Some investors are not in favour of CDS because:
They can amplify systemic risk, as seen during the 2008 Global Financial
Crisis, when defaults triggered large-scale payouts and counterparty failures.
CDS can encourage speculation rather than protection, as investors may buy
CDS on bonds they do not own, effectively betting on a company’s failure (this
is known as a naked CDS), which can create market instability.
c.
Given:
Magong Rural Investments holds R80 million in Moepi Minerals Exploration
bonds.
It buys CDS protection worth R80 million for 3 years from Sedibelo
Development Bank at a premium of 250 basis points (2.5%) per annum.
Scenario 1: Default Occurs
If Moepi Minerals Exploration defaults (e.g., fails to meet its debt obligations,
declares bankruptcy or undergoes restructuring), the CDS contract is
triggered.
Unique Number: 865771
Due date: 30 August 2025
QUESTION 1
a.
Credit default swaps are necessary because they allow investors to manage credit risk.
Specifically, CDS contracts act as insurance against default on debt instruments like
corporate or government bonds. If a borrower defaults, the CDS seller compensates the
buyer for the loss, thus providing protection against credit events such as bankruptcy or
restructuring.
b. Some investors are not in favour of CDS because:
They can amplify systemic risk, as seen during the 2008 Global Financial Crisis,
when defaults triggered large-scale payouts and counterparty failures.
CDS can encourage speculation rather than protection, as investors may buy CDS on
bonds they do not own, effectively betting on a company’s failure (this is known as a
naked CDS), which can create market instability.
DISCLAIMER & TERMS OF USE
Educational Aid: These study notes are intended to be used as educational resources and should not be seen as a
replacement for individual research, critical analysis, or professional consultation. Students are encouraged to perform
their own research and seek advice from their instructors or academic advisors for specific assignment guidelines.
Personal Responsibility: While every effort has been made to ensure the accuracy and reliability of the information in
these study notes, the seller does not guarantee the completeness or correctness of all content. The buyer is
responsible for verifying the accuracy of the information and exercising their own judgment when applying it to their
assignments.
Academic Integrity: It is essential for students to maintain academic integrity and follow their institution's policies
regarding plagiarism, citation, and referencing. These study notes should be used as learning tools and sources of
inspiration. Any direct reproduction of the content without proper citation and acknowledgment may be considered
academic misconduct.
Limited Liability: The seller shall not be liable for any direct or indirect damages, losses, or consequences arising from
the use of these notes. This includes, but is not limited to, poor academic performance, penalties, or any other negative
consequences resulting from the application or misuse of the information provided.
, For additional support +27 81 278 3372
QUESTION 1
a.
Credit default swaps are necessary because they allow investors to manage credit
risk. Specifically, CDS contracts act as insurance against default on debt instruments
like corporate or government bonds. If a borrower defaults, the CDS seller
compensates the buyer for the loss, thus providing protection against credit events
such as bankruptcy or restructuring.
b. Some investors are not in favour of CDS because:
They can amplify systemic risk, as seen during the 2008 Global Financial
Crisis, when defaults triggered large-scale payouts and counterparty failures.
CDS can encourage speculation rather than protection, as investors may buy
CDS on bonds they do not own, effectively betting on a company’s failure (this
is known as a naked CDS), which can create market instability.
c.
Given:
Magong Rural Investments holds R80 million in Moepi Minerals Exploration
bonds.
It buys CDS protection worth R80 million for 3 years from Sedibelo
Development Bank at a premium of 250 basis points (2.5%) per annum.
Scenario 1: Default Occurs
If Moepi Minerals Exploration defaults (e.g., fails to meet its debt obligations,
declares bankruptcy or undergoes restructuring), the CDS contract is
triggered.
