5. Give brief answers to these questions about credit derivatives: (a) CDS protection is often described as taking out insurance against default risk. But in what fundamental ways does CDS protection differ from insurance? (2) (b) What is meant by the CDS spread? (1) (c) If a CDS contract specifies physical settlement in the event of default, what happens at default? (1) (d) An investment bank uses CDS to speculate on changes in the market's opinion of default risk. It holds a protection buyer position with respect to some reference tity. How could the investment bank use CDSs to make a profit out of a worsening credit outlook for the reference entity? (1) (e) Draw a picture of an asset-based CDO structure and explain all the payment flows between the different participants. (3) (f) For the equity and senior tranches of a CDO, explain the effect that increased credit correlation typically has on the value of an investor's security. (2) 5. Give brief answers to these questions about credit derivatives: (a) CDS protection is often described as taking out insurance against default risk. But in what fundamental ways does CDS protection differ from insurance? (2) (b) What is meant by the CDS spread? (1) (c) If a CDS contract specifies physical settlement in the event of default, what happens at default? (1) (d) An investment bank uses CDS to speculate on changes in the market's opinion of default risk. It holds a protection buyer position with respect to some reference tity. How could the investment bank use CDSs to make a profit out of a worsening credit outlook for the reference entity? (1) (e) Draw a picture of an asset-based CDO structure and explain all the payment flows between the different participants. (3) (f) For the equity and senior tranches of a CDO, explain the effect that increased credit correlation typically has on the value of an investor's security. (2)