1. You own an XYZ bond that pays 2.5% for 5 years. To reduce your credit exposure you go long a CDS contract and pay 1.25% per year. You also enter into an interest rate swap at 1% versus Libor. What is your resulting net position? What can go wrong?

2. You think the credit quality of RST bonds will decline. To trade on this strategy do you pay or receive on a CDS contract? RST 5 year bonds currently are T+ 120 and treasury rates are 2%. CDS contracts for RST are +110. If you enter into the CDS for $10m and the contract moves to T+ 130 after one year. What is your gain?

3. You think the credit qualtity of MNO will improve from their current 5-year CDS spread of +150. Do you enter into a CDS to pay the premium or receive? Assume you enter into $20m of CDS and the spread moves to + 170 after 2 years. What is your gain or loss ?