A U.S.insurance company issued a guarantee against default to a German bank.The German bank invested in U.S.mortgaged-backed securities.The U.S.insurer promised that if the issuer of the mortgaged-backed securities defaulted,the insurer would pay the German bank for the loss.The guarantee the U.S.insurer provided is called a(n)
A)insurance option.
B)credit default swap.
C)catastrophe put option.
D)catastrophe bond.

Question

Quizplus · Accepted Answer

The guarantee provided by the U.S. insurer is a credit default swap, which is a financial contract that allows one party to transfer the risk of default on a particular asset (in this case, the U.S. mortgaged-backed securities) to another party in exchange for regular payments.

A USInsurance Company Issued a Guarantee Against Default to a German