5. Give brief answers to these questions about credit derivatives: (a) Draw the picture of the basic structure of a Credit Risk Swap (CDS) and describe the two motives of buying CDS. (3) (b) The following figure represents the payments in a Collaterized Debt Obligations (CDO). Describe the definition of CDO and complete the figure by naming A, B, C and giving examples to D, E, F. Briefly describe how a CDO works according to the structure in the figure. A B C Senior Proceeds of note sale Initial investment D E Mezzanine Interest and principal Interest and principal F Equity (5) (c) Consider a stylized CDO. For the equity and senior tranches, 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) Draw the picture of the basic structure of a Credit Risk Swap (CDS) and describe the two motives of buying CDS. (3) (b) The following figure represents the payments in a Collaterized Debt Obligations (CDO). Describe the definition of CDO and complete the figure by naming A, B, C and giving examples to D, E, F. Briefly describe how a CDO works according to the structure in the figure. A B C Senior Proceeds of note sale Initial investment D E Mezzanine Interest and principal Interest and principal F Equity (5) (c) Consider a stylized CDO. For the equity and senior tranches, explain the effect that increased credit correlation typically has on the value of an investor's security. (2)