question about hedge with credit derivative

[itsyourz]

Hi David,

thank you for quick answer! it is really helpful!

another question on 08 exam page127, no.31

could you explain the answer, how it is hedged against holding corporate bond ?

i think it's strange, because the correct answer c says short CDS

long position of corporate bond with selling CDS ? doesn't it make sense?

suk

 

[David Harper CFA FRM]

Hi suk,

I think it is an error in the answer. I agree with you.

Long CDS = buyer of protection = synthetically short the reference bond
Short CDS = seller of protection = synthetically long the reference bond

The correct here should be: buy the riskless bond and LONG CDS on the Malaysian bond

David