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Question:

Consider the following statements:
Statement 1: In a credit default swap, the protection seller is betting that the reference entity will default.
Statement 2: All other things remaining the same, an American option must have the same value as a European option at expiration.
Which of the following is most likely?

A Only one statement is correct.
Explaination

• In a credit default swap, the protection seller is betting that the reference entity will not default. Effectively, it is providing insurance against credit risk to the protection buyer.
• At expiration, all options are worth their exercise value.