CDS isolate credit risk of a FI security
Comprehe
- two parties: protection buyer,
nsive protec- tion seller (usually a
Questions dealer)
with Reference obligation - debt instru-
Verified ment issued by the reference
Answers entity
Graded A+ Protection buyer buys credit
protec- tion from the protection
seller and pays periodic CDS
spread pmts (fixed at inception)
for the coverage. and
then dealer assumes credit risk, and
would make default payment if de
CDS fault occurs during swap
Obligations and risks of ditterent
1/
26
,par- ties
2/
26
, Protection buyer: "short credit
risk"...and is obligated to make
CDS spread payments
Protection seller: "long credit
risk" and is obligated to make a
payment if a credit event occurs
A CDS on a specific borrower is
called a "single-name CDS"
(ex: bonds is- sued by 1
borrower, NOT a portfolio)
==> Payott on single-name CDS
is based on the "cheapest-to-
deliver" CTD obligation with the
same seniori- ty
When default occurs, CDS
ceases to exist
Index CDS
3/
26
Comprehe
- two parties: protection buyer,
nsive protec- tion seller (usually a
Questions dealer)
with Reference obligation - debt instru-
Verified ment issued by the reference
Answers entity
Graded A+ Protection buyer buys credit
protec- tion from the protection
seller and pays periodic CDS
spread pmts (fixed at inception)
for the coverage. and
then dealer assumes credit risk, and
would make default payment if de
CDS fault occurs during swap
Obligations and risks of ditterent
1/
26
,par- ties
2/
26
, Protection buyer: "short credit
risk"...and is obligated to make
CDS spread payments
Protection seller: "long credit
risk" and is obligated to make a
payment if a credit event occurs
A CDS on a specific borrower is
called a "single-name CDS"
(ex: bonds is- sued by 1
borrower, NOT a portfolio)
==> Payott on single-name CDS
is based on the "cheapest-to-
deliver" CTD obligation with the
same seniori- ty
When default occurs, CDS
ceases to exist
Index CDS
3/
26
