, RSK4804 Assignment 2 (COMPLETE ANSWERS)
Semester 2 2025 - DUE 30 August 2025; 100%
TRUSTED Complete, trusted solutions and
explanations.
Question 1 [10]
In recent years, there has been quite a buzz about credit default
swaps. The turn of events following the 2008 Global Financial
Crisis became a test of the systems that settle credit default
swaps.
a. Why are credit default swaps (CDS) necessary? (2)
CDS serve an important role in financial markets because:
1. Risk transfer: They allow investors (like bondholders) to hedge
against the risk of a borrower defaulting, by shifting credit risk to
another party.
2. Credit enhancement: CDS provide protection so investors can
hold risky debt with reduced exposure.
3. Price discovery & liquidity: They help reveal the market’s view
of a borrower’s creditworthiness and create trading opportunities
even when bonds themselves are illiquid.
4. Capital efficiency: Institutions can manage credit exposures
without selling the underlying assets, freeing up capital for other
investments.
b. Why are some investors not in favour of credit default swaps?
(2)
Some investors criticize or avoid CDS because:
Semester 2 2025 - DUE 30 August 2025; 100%
TRUSTED Complete, trusted solutions and
explanations.
Question 1 [10]
In recent years, there has been quite a buzz about credit default
swaps. The turn of events following the 2008 Global Financial
Crisis became a test of the systems that settle credit default
swaps.
a. Why are credit default swaps (CDS) necessary? (2)
CDS serve an important role in financial markets because:
1. Risk transfer: They allow investors (like bondholders) to hedge
against the risk of a borrower defaulting, by shifting credit risk to
another party.
2. Credit enhancement: CDS provide protection so investors can
hold risky debt with reduced exposure.
3. Price discovery & liquidity: They help reveal the market’s view
of a borrower’s creditworthiness and create trading opportunities
even when bonds themselves are illiquid.
4. Capital efficiency: Institutions can manage credit exposures
without selling the underlying assets, freeing up capital for other
investments.
b. Why are some investors not in favour of credit default swaps?
(2)
Some investors criticize or avoid CDS because:
