Credit default swaps: confusion b/w short and long

CFA Level II
#1

Hello,

From the level 2 solutions to this chapter, the following statement was used to explain one of the EOCQs… “To take advantage of Chan’s view of the US credit curve steepening in the short term, a curve trade will entail shorting (buying protection using) a long-term (20-year) CDX and going long (selling protection using) a short-term (2-year) CDX. A steeper curve means that long-term credit risk increases relative to short-term credit risk.”

Now, please help me understand and correct me if I am wrong. If someone is long the CDS, it means that they have purchased a CDS and will be making premium scheduled payments to the protection seller and therefore that someone is short the credit risk. Making the protection seller long the credit risk. With this understanding, if correct, then I am having a hard time with the question above since the solution says selling protection by going long the CDX. Who is correct?

Thanks in advance everyone.

#2

The terminolgy is confussing here:
If you buy protection you are going short the credit risk
If you sell protection you are long the credit risk (and receiving the regular premiums)

The pricing of a CDS = 100 - upfront premium
Upfront premiium covers any extra risk that the protection seller is taking on above the standard premium

If risk increases the price of the CDS will decline

So the the protection buy is short credit risk and short the CDS

The CFA usually shy away from using terms long/short CDS and use
buying protection , short credit risk
selling protection, long credit risk