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      Question

      Evaluate the following statements regarding Credit

      Default Swaps (CDS): 1. It is a credit derivative contract that enables an investor to transfer credit risk. 2. The buyer of the CDS makes periodic payments to the seller. 3. If a credit event (default) occurs, the seller of the CDS compensates the buyer. Which of the statements above is/are correct? 
      A 1 and 2 only Correct Answer Incorrect Answer
      B 2 and 3 only Correct Answer Incorrect Answer
      C 1, 2, and 3 Correct Answer Incorrect Answer
      D 1 and 3 only Correct Answer Incorrect Answer
      E 2 only Correct Answer Incorrect Answer

      Solution

      All statements are correct. A CDS acts like an insurance policy where the buyer pays a premium (spread) to protect against the default of a specific debt issuer.

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