Otabek

Sorry about that -- here is the question

Which of the following most accurately describes a credit curve steepener trade using credit default swaps? The investor:

A) buys a short-term credit default swap and sells a long-term credit default swap.

B) sells a credit default swap on a firm’s subordinated debt and buys a cheaper credit default swap on the senior debt.

C) buys a long-term credit default swap and sells a short-term credit default swap.


Your answer: A was incorrect. The correct answer was C) buys a long-term credit default swap and sells a short-term credit default swap.

In a curve trade, an investor has different opinions about the long term versus short term prospects for a bond issuer. The trade can be a flattener or a steepener. In a credit curve steepener, the investor believes that the issuer has the ability to subsist in the short term, but that its long-term prospects are poor. The sale of the short-term credit default swap partially finances the purchase of the long-term credit default swap.