Hey, in concept check in my CFA book 5 it asked: Distinguish between the risks transferred via a total return swap in contrast to the risks transferred via a credit default swap.? I can guess CDS/TRS benefits sellers in pension plans. Any other ideas?
The way I understand it is that TRS transfers risk of loss in total asset value. CDS transfers default risk only (its essentially bond insurance).
They are asking you to distinguish the risks transferred. A CDS only transfers the risk associated with a credit event including a default, restructuring, etc… A total return swap transfers all the risk associated with the price of the bond as well as the interest payments. Thus, you can own a bond and a CDS and be getting whacked because of some problem other than default risk. That can’t happen in a total return swap.