[ 2009 FRM Sample Exam ] Quantitative Analysis Q6 protection, statements, following, principal, technical

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6. Which of the following statements is incorrect about a credit event in relation to a credit default swap (CDS)?

A. When a technical default based on a financial ratio calculation occurs, a credit event is said to have occurred.

B. A credit event is defined as an actual default if the firm misses a coupon or principal payment

C. For the protection buyer to receive a payment from a CDS, a credit event has to occur

D. If a credit event takes place, the buyer of the CDS will make a final cash payment

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Correct answer is D

The seller (not the buyer) will make the final payment.

A to C: All are correct statements.

Reference: Hull, Chapter 27.

Type: Credit Risk.