Finance · Credit Derivatives

The development of the Credit Default Swap (CDS) market in India has been a calibrated process by the RBI to enhance credit risk management. Evaluate the following technical statements regarding CDS contracts: Statement 1. A Credit Default Swap allows the protection buyer to hedge the risk of default by a specific 'Reference Entity' by paying a periodic 'CDS Spread' to the protection seller. Statement 2. According to the 2022 RBI Master Direction on Credit Derivatives, only 'Investment Grade' corporate bonds can be the reference obligations for a CDS contract, and 'Speculative Grade' bonds are strictly prohibited from the market. Statement 3. A 'Credit Event' that triggers the settlement of a CDS includes bankruptcy, failure to pay, and certain types of debt restructuring that are detrimental to the interest of the creditors. Statement 4. In a 'Physical Settlement' of a CDS, the protection buyer delivers the defaulted bond to the protection seller in exchange for the full face value of the bond in cash. Select the correct analysis of these statements.