At a given point in time, the price of a credit default swap contract should be ________ related to the default risk of the securities covered by the contract. For a given set of securities that are covered by a credit default swap, the price of the contract should be _______ related to the default risk as it changes over time.

Question

Quizplus · Accepted Answer

The price of a credit default swap (CDS) contract is positively related to the default risk of the securities covered by the contract. This means that as the perceived risk of default increases, the cost of purchasing a CDS to insure against that default also increases. Similarly, if the default risk changes over time, the price of the contract adjusts in the same direction, maintaining a positive relationship.

At a Given Point in Time, the Price of a Credit