CDS

Question 1

Deficiencies of CDS

Answer 1

1. deal is done OTC
2. Traded on unfunded basis - can cause greater speculation and as a result subpresses bond prices => destabilise market with no real economic benefit

Question 2

Benefit of CDS

Answer 2

1. allows the transfer credit exposure
2. hedging tool against credit event risk
   CDO transfer credit risk to market and CDS allows this risk to be hedged