The buyer of a credit-default swap (CDS):
A. Has no risk exposure to the combined holdings of the CDS and reference obligation.
B. Is subject to the credit risk of the seller.
C. Must place collateral with the seller of the CDS to ensure performance.
D. Can surrender the CDS for the value of the accumulated payments.
Answer:B
The buyer of the CDS faces the risk that the seller may not be able to make the required payment.
If the reference obligation defaults. Two factors impact this risk: (1) if the probability of the reference obligation default increases with time, then so, too, may the probability of seller default, and (2) economic and operational factors may cause an increase in the correlation between the default of the reference obligation and the seller's default.