You are the buyer of protection in a credit default swap. All other things being equal your counterparty credit risk is increasing if:
A) the credit spread is decreasing
B) the credit spread is decreasing and recovery rate is increasing
C) the credit spread is increasing
D) the recovery rate is increasing

Question

Quizplus · Accepted Answer

The buyer of protection in a credit default swap is essentially purchasing insurance against the default of a particular debt issuer. If the spread is increasing, it means that the market perceives a higher likelihood of default for the underlying debt. As the buyer of protection, this increases your counterparty credit risk because it means that your counterparty is more likely to have to pay out on the swap, and if they default on their obligation to you, you may not be able to collect on the protection you purchased. A decreasing spread or increasing recovery rate would reduce the counterparty credit risk because it reduces the likelihood of default on the swap.

You Are the Buyer of Protection in a Credit Default