1. If you are an equity asset manager and wish to diversify away from stocks, what credit derivative would you choose? 2. What are some of the advantages to a seller and a buyer in a credit spread...

1. If you are an equity asset manager and wish to diversify away from

stocks, what credit derivative would you choose?

2. What are some of the advantages to a seller and a buyer in a

credit spread option contract?

Sundaram

& Das: Derivatives – Problems and Solutions . . . . . . . . . . . . . . . .

. . . . . . . . . . . . . . . 468

3. What is a credit-sensitive note (CSN)? How does it work? What is

the advantage to the issuer? To the investor? What are the drawbacks to the

investor?

4.

What is an n-th to default contract? How does credit correlation

impact this contract?

5.

You expect that the market’s expectation of recovery amount of a

given issuer will be higher in a few weeks. There are two reference instruments

for the same issuer: senior

(S)

and junior (J). Which of the following strategies would you

prefer? Explain why.

(a)

Long S, long J

(b)

Long S, short J

(c)

Short S, long J

(d)

Short S, short J