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. Terms of use
By making use of this document you agree to:
Use this document as a guide for learning, comparison and reference purpose,
Terms of use
Not to duplicate, reproduce and/or misrepresent the contents of this document as your own work,
By making use of this document you agree to:
Use this document
Fully accept the consequences
solely as a guide forshould you plagiarise
learning, reference,or and
misuse this document.
comparison purposes,
Ensure originality of your own work, and fully accept the consequences should you plagiarise or misuse this document.
Comply with all relevant standards, guidelines, regulations, and legislation governing academic and written work.
Disclaimer
Great care has been taken in the preparation of this document; however, the contents are provided "as is" without any express or
implied representations or warranties. The author accepts no responsibility or liability for any actions taken based on the
information contained within this document. This document is intended solely for comparison, research, and reference purposes.
Reproduction, resale, or transmission of any part of this document, in any form or by any means, is strictly prohibited.
, +27 67 171 1739
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.
Disclaimer
Great care has been taken in the preparation of this document; however, the contents are provided "as is"
without any express or implied representations or warranties. The author accepts no responsibility or
liability for any actions taken based on the information contained within this document. This document is
intended solely for comparison, research, and reference purposes. Reproduction, resale, or transmission
of any part of this document, in any form or by any means, is strictly prohibited.
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. Terms of use
By making use of this document you agree to:
Use this document as a guide for learning, comparison and reference purpose,
Terms of use
Not to duplicate, reproduce and/or misrepresent the contents of this document as your own work,
By making use of this document you agree to:
Use this document
Fully accept the consequences
solely as a guide forshould you plagiarise
learning, reference,or and
misuse this document.
comparison purposes,
Ensure originality of your own work, and fully accept the consequences should you plagiarise or misuse this document.
Comply with all relevant standards, guidelines, regulations, and legislation governing academic and written work.
Disclaimer
Great care has been taken in the preparation of this document; however, the contents are provided "as is" without any express or
implied representations or warranties. The author accepts no responsibility or liability for any actions taken based on the
information contained within this document. This document is intended solely for comparison, research, and reference purposes.
Reproduction, resale, or transmission of any part of this document, in any form or by any means, is strictly prohibited.
, +27 67 171 1739
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.
Disclaimer
Great care has been taken in the preparation of this document; however, the contents are provided "as is"
without any express or implied representations or warranties. The author accepts no responsibility or
liability for any actions taken based on the information contained within this document. This document is
intended solely for comparison, research, and reference purposes. Reproduction, resale, or transmission
of any part of this document, in any form or by any means, is strictly prohibited.
