In credit trading, as described in the material, selling credit is essentially selling credit as short-term lending to the purchaser. Which option best describes this concept?

• A. Long-term lending to the purchaser
• B. Short-term lending to the purchaser
• C. Equity financing
• D. Debt restructuring

Answer: (B)

The concept being tested is that selling credit in credit trading is like providing short-term financing to the buyer. When you sell credit, you receive cash upfront and transfer the exposure to the buyer for a brief period, effectively funding the buyer’s access to that credit exposure just for a short horizon. This mirrors lending for a short duration, where the seller supplies financing and the position unwinds in a short time frame.

Long-term lending to the purchaser would imply a longer repayment horizon, which doesn’t fit the short-duration nature of these trades. Equity financing would involve exchanging ownership rather than providing a credit exposure. Debt restructuring concerns altering the terms of existing debt, not selling new credit exposure to finance a buyer.