CDS Flashcards
Credit risk
is dispersion in financial outcomes associated with the failure or potential failure of counterparty to fulfill its financial obligations.
Credit protection buyer In a CDS
the credit protection buyer pays a periodic premium on a predetermined notional amount in exchange for a contingent payment from the credit protection seller if a specified credit event occurs.
Credit protection seller
receives a periodic premium in exchange for delivering a contingent payment to the credit protection buyer if a specified credit event occurs.
CDS spread or CDS premium
is paid by the credit protection buyer to the credit protection seller and is quoted in basis points per annum on the notional value of the CDS.
Derivatives
are cost-effective vehicles for the transfer of risk, with values driven by an underlying asset.
Credit default swap (CDS)
is an insurance-like bilateral contract in which the buyer pays a periodic fee (analogous to an insurance premium) to the seller in exchange for a contingent payment from the seller if a credit event occurs with respect to an underlying credit-risky asset.
Physical settlement
requires the credit protection seller to purchase the impaired loan or bond from the credit protection buyer at par value.
Cash settlement
requires the credit protection seller to makes the credit protection buyer whole by transferring to the buyer an amount of cash based on the contract once a credit event has occurred.
Auction process
involves bidding among several private equity firms, with the deal going to the highest bidder.
Referenced asset
(also called the referenced bond, referenced obligation, or referenced credit) is the underlying security on which the credit protection is provided.
Standard ISDA agreement
serves as a template to negotiated credit agreements that contain commonly used provisions used by market participants.
Credit events that give rise to credit risk
include bankruptcy, downgrading, failure to make timely payments, certain corporate events, and government actions.
Acceleration
is a requirement that debt be repaid sooner than originally scheduled, such as when the senior lender can declare the senior debt due and payable immediately.
Notional principal
(or notional value) of a contract is the value of the asset underlying, or used as a reference to, the contract or derivative position.
Law of one price
states that, absent transaction and transportation costs, the same item should have the same price in all countries adjusted using current exchange rates.
Convergence
is the return of prices or rates to relative values that are deemed normal.
Zero sum game
is a market, environment, or situation in which any gains to one party must be
equally offset by losses to one or more other parties.
Market-making
is a practice whereby an investment bank or another market participant deals securities by regularly offering to buy securities and sell securities.
Total return swap
requires the credit protection buyer, typically the owner of the credit risky asset, to pass on the total return of the asset to the credit protection seller in return for a certain payment.
Mark-to-market adjustment
is the process of altering the value of a CDS in the accounting and financial systems of the CDS parties.
Novation or assignment
is when one party to a contract reaches an agreement with a third party to take over all rights and obligations to a contract.