Credit Default Swap (CDS)
A contract that transfers the default risk of a bond from one party to another.
Detailed Description
Credit Default Swap (CDS)
What is the primary purpose of a Credit Default Swap (CDS)?
The primary purpose of a CDS is to manage and mitigate credit risk by providing protection against potential losses from borrower defaults.
What are the two main ways a CDS contract can be settled?
A CDS contract can be settled through physical settlement, where the underlying bonds are delivered, or cash settlement, where the cash difference is paid.
What is counterparty risk in the context of CDS?
Counterparty risk is the risk that the seller of the CDS may default on their obligation to pay the buyer if a credit event occurs.
What are Single-name and Index CDS?
Single-name CDS are linked to a single entity, while Index CDS involve a basket of underlying credits for diversified exposure.
How has regulation affected the CDS market?
Regulators have increased scrutiny on the CDS market post-2008 financial crisis, implementing measures for transparency and reducing counterparty risk.