Credit Derivatives

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Credit Derivatives

• R96022087 ???

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Credit Derivatives

• Market risks
• Credit Default Swap(CDS)

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CDS

• provides insurance
• reference entity
• Buyer
• has the right to sell bonds issued by the
  company
• makes periodic payment to the seller
• CDS spread, notional principal
• Seller
• agree to buy the bonds

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CDS

• Physical settlement
• 100 of face value
• Cash settlement
• determine the mid-market value of the cheapest
  deliverable bond
• recovery rate

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CDS

• Hedge a position in a corporate bond
• risky-rate
• risk-free-rate CDS spread

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Credit Indices

• track CDS spread
• a list of credit instruments or exposures
  designed to be representative of some part of the
  credit market as a whole

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CDS

• Valuation
• Marking to Market a CDS
• Binary CDS
• The future of CDS

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To be continued..