China's giant property developer Country Garden has been declared in default on its debt after failing to make a bond repayment by a final deadline of October 18. A panel of global banks and investors said Thursday that a "failure to pay" event had occurred on that date, laying the foundation for investors to receive payouts on credit default swaps (CDS). A CDS is a derivative that allows an investor to swap their credit risk with that of another investor. It's similar to an insurance product in that it can protect buyers against losses arising from debt default by a company or government. The Credit Derivatives Determinations Committee, which oversee the CDS market, convened a meeting on Wednesday to discuss whether Country Garden's missing bond payment would trigger CDS payouts. Twelve members of the committee, including investment banks and hedge funds such as JP Morgan, Goldman Sachs and Citadel Americas, agreed that Country Garden was involved in a "failure to pay" event last week, according to a statement posted on Thursday. Country Garden, formerly China's largest homebuilder, missed the payment on a $500 million bond as it battles a liquidity crisis. The company had already warned investors that it could default on its offshore debt, after reporting a deepening plunge in its sales last month. "Although this is no surprise given [Country Garden's] expectation of not meeting offshore payment obligations within grace periods, we expect the formal default to further weigh on homebuyers' confidence in Country Garden's brand," Jeff Zhang, an equity analyst at Morningstar, wrote in a research note. The deepening crisis at Country Garden offers more evidence that China's all-important property market is languishing in a deep downturn that poses a major threat to the country's growth prospects. Analysts say it could take years to climb out of the slump because housing demand is waning as the population ages........" Source: CNN.com Required:

(a) Assume that you are the lead hedge strategist for JP Morgan Chase and that JP Morgan has invested in Country Garden's bonds and simultaneously hedged its credit risk using credit default swaps. Analyse how a default on Country Garden's bond payments would impact JP Morgan's CDS positions. In your answer explain what position they would have taken and how it works, along with possible drawbacks of this strategy.