In recent years, there has been quite a buzz about credit default swaps. The turn of events following the $2008$ Global Financial crisis became a test of the systems that settle credit default swaps.

$1.$

Define credit default swaps $($CDS$)$ and why they are necessary. $(4)$

$2.$

Reliant Capital has invested R$85$m in bonds issued by Swartklip PGM Exploration. Reliant is worried that Swartklip PGM Exploration may face a financial crisis. Therefore, Reliant buys R$85$m worth of CDS protection on Swartklip PGM Exploration debt for two years from Kwena Investment Bank at a premium of $300$ bps $(3\%)$ per annum. Explain scenarios of default and no default.