Global Credit Corp. and Its CDS Strategy

Very Hard Credit Analysis And Valuation Credit Derivatives

Global Credit Corp. is a multinational telecommunications company that recently faced credit downgrades due to significant declines in revenue caused by market competition. Following this, the company's management decided to enter into a credit default swap (CDS) agreement to hedge against the risk of default. As part of this agreement, Global Credit Corp. is both the protection buyer and seller. An analyst is trying to assess the implications of this dual role in the CDS transaction to determine how credit risk is managed and the potential impact on Global Credit Corp.'s financial standing.

Within the CDS market, a key aspect of performance can be attributed to the perceived creditworthiness of the reference entity. Given that Global Credit Corp. also has exposure to its own credit risk as the protection seller, it is important to evaluate how the dual role in the CDS affects its risk profile. Which of the following statements accurately describes the implications of Global Credit Corp.'s involvement in the CDS agreement?

As a protection buyer, Global Credit Corp. reduces its credit risk but may inadvertently increase its overall credit exposure when acting as the protection seller.

By acting solely as the protection buyer, Global Credit Corp. would completely eliminate its exposure to default risk from the reference entity.

Becoming a protection seller allows Global Credit Corp. to hedge against worsening credit risk but exposes the company to capital charges under regulatory guidelines.

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