“A credit default swap (CDS) is a bilateral agreement designed explicitly to shift credit risk between two parties. In a CDS, one party (protection buyer) pays a periodic fee to another party (protection seller) in return for compensation for default (or similar credit event) by a reference entity”.
Credit Default Swaps (CDS) are by far the most popular credit derivatives and have proven to be the most successful financial innovation. The structure of CDS is somewhat similar to the insurance policy. The market of CDS has heavily expanded and is traded in Over-The-Counter (OTC) market.
This essay will briefly address the structure and the market of CDS, outlining its common products usage by some large institutions. Following the review of financial structure and pricing of CDS. And finally, this essay will also evaluate the risk management and investment applications of such products.
Inhaltsverzeichnis (Table of Contents)
- 1. Introduction
- 2. Literature Review
- 3. Application
- 3.1 Development of the CDS Market
- 3.2 Pricing and Valuation of CDS
- 3.3 Risk Management and Investment Applications
- 4. Conclusion
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This essay aims to provide an overview of Credit Default Swaps (CDS), focusing on their structure, market dynamics, pricing, valuation, and risk management applications. It explores the use of CDS by large institutions and evaluates their role in investment strategies.
- Structure and market of Credit Default Swaps (CDS).
- Pricing and valuation of CDS.
- Risk management aspects of CDS.
- Investment applications of CDS.
- Comparison of CDS to insurance policies.
Zusammenfassung der Kapitel (Chapter Summaries)
1. Introduction: This introductory chapter defines a credit default swap (CDS) as a bilateral agreement designed to transfer credit risk between two parties. One party (protection buyer) pays a fee to another (protection seller) for compensation if a reference entity defaults. The chapter highlights the popularity and success of CDS as a financial innovation, similar in structure to an insurance policy. The essay outlines its scope: examining the structure and market of CDS, reviewing their pricing and financial structure, and evaluating their risk management and investment applications.
2. Literature review: This chapter delves into the characteristics of credit default swaps as credit derivatives traded in the over-the-counter (OTC) market. It emphasizes their significant contribution to the global economy by providing a liquid market for trading and hedging credit risk. The chapter explains the basic mechanism: a protection buyer pays a periodic fee to a protection seller for protection against losses from a reference entity's default. The buyer is short the underlying credit risk, while the seller is long. The chapter introduces different types of CDS, such as basket CDS (multiple reference entities), first-to-default CDS, and nth-to-default CDS, highlighting the complexity of valuing these compared to standard CDS and how default correlation between entities affects pricing.
Schlüsselwörter (Keywords)
Credit Default Swaps (CDS), Credit Derivatives, Risk Management, Investment Applications, Pricing, Valuation, OTC Market, Default Correlation, Protection Buyer, Protection Seller, Reference Entity, Basket CDS.
FAQ: Comprehensive Language Preview of Credit Default Swaps
What is the purpose of this document?
This document provides a comprehensive preview of a text about Credit Default Swaps (CDS), including the table of contents, objectives, key themes, chapter summaries, and keywords. It serves as a structured overview for academic use, facilitating the analysis of themes within the full text.
What topics are covered in the document?
The document covers various aspects of Credit Default Swaps (CDS), including their structure, market dynamics, pricing, valuation, risk management applications, and use in investment strategies. It also compares CDS to insurance policies and explores different types of CDS, such as basket CDS and nth-to-default CDS.
What are the key themes explored in the text?
Key themes include the structure and market of CDS, pricing and valuation methodologies, risk management aspects, investment applications of CDS, and the comparison between CDS and traditional insurance policies. The impact of default correlation between entities on pricing is also a significant theme.
What is a Credit Default Swap (CDS)?
A Credit Default Swap (CDS) is a bilateral agreement where one party (protection buyer) pays a fee to another (protection seller) in exchange for compensation if a specified reference entity defaults on its debt obligations. It functions similarly to an insurance policy against credit risk.
What are the different types of CDS mentioned?
The document mentions standard CDS, basket CDS (involving multiple reference entities), first-to-default CDS, and nth-to-default CDS. The complexity of valuing these different types, particularly in relation to default correlation, is highlighted.
How are CDS priced and valued?
The document indicates that pricing and valuation of CDS are significant topics, but details are deferred to the full text. It highlights the complexity involved, especially with non-standard CDS types and the influence of default correlation between reference entities.
What is the role of CDS in risk management and investment strategies?
The document emphasizes the importance of CDS in both risk management and investment strategies. The full text will likely delve into specific applications and how large institutions utilize CDS for these purposes.
Where are CDS traded?
Credit Default Swaps are traded in the over-the-counter (OTC) market.
What are the key words associated with this document?
Key words include: Credit Default Swaps (CDS), Credit Derivatives, Risk Management, Investment Applications, Pricing, Valuation, OTC Market, Default Correlation, Protection Buyer, Protection Seller, Reference Entity, Basket CDS.
- Quote paper
- Panagiotis Papadopoulos (Author), 2010, Credit Default Swaps - Pricing, Valuation and Investment Applications, Munich, GRIN Verlag, https://www.grin.com/document/170187
