Credit default swaps are a method that many banks holding large bond portfolios use to reduce

their credit risk.

Prepare a one-page briefing document that sets out how credit default swap can help the bank

(SNB) in the following example reduce the probability of suffering a credit loss.

Super National Bank (SNB) has a $50,000,000 debt exposure to Wilkin Ltd. SNB has the

opportunity to arrange a credit default swap with All American Bank to cover this exposure. The

individual probabilities of default for each of the parties is as follows:

Super National Bank: 0.15%

All American Bank: 0.40%

Wilkin Ltd: 4.5%