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| FI holds a large position with a 10-year maturity. Recently, Bales has observed a significant increase in the spread relative to the 10-year Treasury. Today he learns that Moody’s has changed the rating on the bond from investment grade to speculative. In terms of credit risk, FI is dealing with: A. credit spread and downgrade risk. Credit spread risk can be managed with credit spread options, credit spread forwards, and total return swaps. Downgrade risk can be managed with credit options, credit swaps, and total return swaps. B. credit spread and default risk. Credit spread risk can be managed with credit options and credit forwards. Default risk can be managed with credit forwards, swaps, and credit options. C. credit spread, default and downgrade risk. Credit spread risk can be managed with credit options and credit forwards. Downgrade risk can be managed with either credit forwards or swaps. Default risk can only be managed with swaps. |