8010 Exam Dumps | A long position in a creditsensitive bond can be synthetically replicated using:

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PRMIA.8010.v2022-06-27.q87
Question 69

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Question 69/87

A long position in a creditsensitive bond can be synthetically replicated using:

A. a long position in a treasury bond and a short position in a CDS

B. a long position in a treasury bond and a long position in a CDS

C. a short position in a treasury bond and a short position in a CDS

D. a short position in a treasury bond and a long position in a CDS

Correct Answer: A

Explanation
The correct answer is choice 'a'
A long position in a credit sensitive bond is equivalent to earning the risk free rate and the spread on the bond.
The risk freerate can be earned through a long position in a treasury bond, and the spread can be earned in the form of premiums on a CDS, which are received by the protection seller, ie the party short a CDS contract.
Therefore we can get the same results as a long bond position using a combination of a long treasury bond and a short position in a CDS. Choice 'a' is the correct answer.

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