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Good Luck for those taking the FRM exam in 2 days time!

#26
Hi, Feel the same as above, mostly qualatitive but some of the quant questions threw me.
I did not know what a digital CDS was.
I think the question went: what does the CDS buyer do upon default of the underlying. Anyone know the correct answer?
 
#27
Hi, Feel the same as above, mostly qualatitive but some of the quant questions threw me.
I did not know what a digital CDS was.
I think the question went: what does the CDS buyer do upon default of the underlying. Anyone know the correct answer?
Digital CDS means the payoff is fixed irrespective of recovery. So the CDS buyer will take par amount on default and deliver underlying.
 

Pflik

Active Member
#28
Digital Credit Default Swap
Unlike standard credit default swaps which require a valuation following a credit event (usually default), digital swaps simply specify payment of a fixed dollar payoff. The payoff amount is determined at the contract time, taking into account the severity of the default event. In the vanilla credit default swap, the payoff is equal to the notional principal of the swap minus the post-default value of the insured assets. Therefore, the payoff in a digital credit default swap (digital CDS) is stipulated in the contract, rather than left to be determined following the default. A digital CDS can be used by investors seeking to enhance the yield on their portfolios. As the implied fixed recovery rate is typically below market rates, the protection seller will receive a higher premium than that associated with a vanilla CDS.
i don't see anywhere that they state you have to deliver the underlying. I think the digital/binary cds is a predetermined amount of recovery value of the underlying such that the cds will pay out before the underlying recovery value has been valuated.

for a normal CDS you need to deliver the underlying asset
Credit Default Swap
An agreement that gives the holder the right to sell a contractual obligation (bond, loan) for its face value in the event the issuer defaults.... ...The protection buyer will have the right, if a credit event takes place, to deliver the debt instrument (the reference bond) to the protection seller and receive, in return, its face value.
 
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#29
i don't see anywhere that they state you have to deliver the underlying. I think the digital/binary cds is a predetermined amount of recovery value of the underlying such that the cds will pay out before the underlying recovery value has been valuated.

for a normal CDS you need to deliver the underlying asset
I remember this question clearly from exam.i agree/think,there is no delivery of asset.so 2 options ruled out given in exam.The other two options were
a)pay predetermined amount,no delivery of asset
c)pay par value less current market price, no delivery of asset
From the above information, option a is correct.
 

Pflik

Active Member
#30
i think it should be a... because the recovery value is predetermined (and you know the par value thus the amount is predetermined) option c is a synthetic cds
 
#32
Hi Rodrigovs

The.delta is not exactly zero, but almost. Remember how an asian option works.. the payoff depends on what the AVERAGE share price was in the period. Say the option period was 100 days- and one day before the option expiry the average share price over the 99 days so far was e.g.$110. If this is an Asian call with a strike price of $100 then you can be pretty darned sure that the payoff will be $10. For the average 100 day share price to change from the 99 day average- you'd need some seriously massive move on day 100. So what happens on the last day doesn't really matter that much because you already know that the payoff is going to pretty much $10.

This is exactly what delta measures: if the price of the inderlying security changes - then what happens to the value of the option. As per the discussion above - on day 99 - almost no matter what happens on the last day - the value of the option will be $10. So with almost no sensitivity to the price of the underlying-there's almost no delta (i.e. the delta is very close to zero).
 
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