Hi!
Question 3) of the Morning CFA Mock (b). It says that if Credt Risk on a bond weaken on the near term and than come back to normal on long term you should go long the shor term and sell the Long term CDS. shouldn’t it be the reverse?
Thx!!
Does credit risk weakening mean that there’s more credit risk or less credit risk?
ops, you are right! but actually the question says that the credit rating weaken. and later it will improve to the previous metrics… shouldn’t it mean that now CDS has to pay a higher premium for the probability of default?
So if, in the near term, it’s more likely that there will be a credit event, you want to be long the near-term and finance it by being short the long-term. The premium should be higher, but perhaps you have this insight and the CDS market hasn’t incorporated it yet.
ah alright I get it. My confusion was bcs I was thinking that investor would have bought it after the the event occur. makes sense thank you!
You’re welcome.
is buy protection = buy CDS?
Yes.