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    Question

    A ______is a financial derivative  or contract that

    allows an investor to "swap" or offset his or her credit risk  with that of another investor.
    A Credit Default Swap Correct Answer Incorrect Answer
    B Mortgaged backed Swap Correct Answer Incorrect Answer
    C Asset backed Swap Correct Answer Incorrect Answer
    D Straddle Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    Solution

    A credit default swap (CDS) is a financial derivative  or contract that allows an investor to "swap" or offset his or her credit risk  with that of another investor. For example, if a lender is worried that a borrower is going to default  on a loan, the lender could use a CDS to offset or swap that risk. To swap the risk of default, the lender buys a CDS from another investor who agrees to reimburse the lender in the case the borrower defaults. Most CDS will require an ongoing premium  payment to maintain the contract, which is like an insurance policy.

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