What Is the Function of a Credit Derivative

question 13

Multiple Choice

What is the function of a credit derivative?

• A)to transfer risk to another party for a fee
• B)to derive their value from the underlying debt instruments such as loans
• C)for the purchaser of the credit derivative, to hedge default risk like an insurance policy against default would
• D)All of the above are functions of a credit derivative.

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Definitions:

Lemon Test

A three-pronged test established by the Supreme Court in Lemon v. Kurtzman (1971) to determine when a government's action violates the Establishment Clause of the First Amendment, ensuring separation of church and state.

Three Parts

Refers to the three branches of the U.S. government: legislative, executive, and judicial, established to ensure a balance of power.

Discuss

The act of exchanging ideas or debating topics, often with the aim of reaching a more informed understanding.

First Amendment

A change to the U.S. Constitution that safeguards the rights related to religious practices, speech, gathering, and the ability to appeal to the government.