Today,investor A buys protection on a first-to-default basket,while investor B buys protection via Credit Default Swaps on each individual name in that basket.All contracts have the same maturity.Suppose that at maturity,it turns out that only one name out of the basket has defaulted then,

Question

Quizplus · Accepted Answer

Investor A has bought protection on a first-to-default basket, which means they will receive a payout if any name in the basket defaults first. In this case, only one name has defaulted, so Investor A will receive a payout for that name.

Investor B, on the other hand, has bought CDS on each individual name in the basket. Since only one name has defaulted, they will only receive a payout for that one name.

Therefore, Investor A's strategy has been at least as profitable as Investor B's strategy in this scenario.

Today,investor a Buys Protection on a First-To-Default Basket,while Investor B