A CDS with a Number of Reference Entities Provides a Payoff

question 11

Multiple Choice

A CDS with a number of reference entities provides a payoff when any of the reference entities defaults. What is a name for this CDS?

• A) Binary CDS
• B) Add-up Basket CDS
• C) First-to-Default CDS
• D) n-to-Default CDS

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Definitions:

Principal-Agent Problems

Conflicts of interests that arise when one party (the agent) is expected to act in the best interest of another (the principal) but has an incentive to act in their own interest.

Monopoly

A market structure characterized by a single seller, selling a unique product in the market with no close substitutes and high barriers to entry.

Deregulate

The process of removing or reducing government regulations from an industry or business, often to foster more competition and innovation.

Legal Cartel Theory

A theory that proposes legal frameworks and regulations can sometimes create environments that encourage the formation of cartels, or cooperate between firms to control prices and output like a monopoly.