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From the perspective of the buyer, list 3 factors affect the credit risk of a CDS.

From the perspective of the buyer, list 3 factors affect the credit risk of a CDS.

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Answer #1

Factors that affect the credit risk of a CDS:

1. Systematic risk: when the systematic risk increases in the economy then the credit risk of a CDS increases as well. As was it happened during the 2008 financial crisis.

2. Downgrade in the rating of CDS seller: if there is downgrade of rating of CDS seller then there is increase in credit risk of CDS where there is huge chances that CDS seller will not able to oblige to its promise.

3. Capital inadequacy of the CDS protection sellers: in this case again there is huge risk of increase in credit risk.

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