Suppose you are a risk manager at a financial institution, and your company has loaned a significant amount of ₹ 500 crore to a company X Ltd. for a…

CA Final · Advanced Financial Management · MTP · November 2026
Suppose you are a risk manager at a financial institution, and your company has loaned a significant amount of ₹ 500 crore to a company X Ltd. for a period of 3 years at 6-month at MCLR plus 200 bps. You are concerned about X Ltd.'s ability to repay the debt due to recent market volatility. To protect your institution from potential default, you decide to purchase a Credit Default Swap (CDS) from ABC Bank Ltd. for same notional amount at a premium quoted at 1% per year through cash settlement.On the respective reset dates for the same period actual MCLR interest rate comes out as follows: Reset MCLR 1 9.75% 2 10.00% 3 10.25% 4 10.35% 5 10.50% 6 10.60% Based on the above information answer the following questions:
(A) to increase the value of bonds.
(B) to protect against default risk of a debt obligation.
(C) to provide guaranteed profit to the buyer.
(D) to create a new form of loan.

Suggested Answer and Working Notes:

Correct Answer: Option (B)

to protect against default risk of a debt obligation.
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