Credit Default Swaps

Question 0

Credit Derivative

Answer 0

Derivative where the payoff depends on the creditworthiness of a company or sovereign entity.

CDS is the most popular one.

Question 1

Benefits of Credit Default Swaps

Answer 1

1. allow credit risks to be traded.
2. can be used to transfer credit risk to a third party.
3. can be used to diversify credit risks,

Question 2

Buyer of the CDS

Answer 2

Aquires protection against a default of a particular entity.

Has the right to sell bonds issued by the reference unit for their face value to the seller of the CDS when a credit event occurs.

Question 3

Credit Event

Answer 3

Default is defined as credit event.

Until the credit event occurs the buyer makes periodic payments to the seller.

If the credit event occurs, the CDS is either settled in cash or with physical delivery.