Details

Autor(en) / Beteiligte

• Paulos, Erica
• Sultanum, Bruno
• Tobin, Elliot

Titel

CDS Auctions: An Overview

Ist Teil von

• Economic quarterly - Federal Reserve Bank of Richmond, 2019-03, Vol.105 (2), p.105-132

Ort / Verlag

Richmond: Federal Reserve Bank of Richmond

Erscheinungsjahr

2019

Quelle

PAIS Index

Beschreibungen/Notizen

• A credit default swap (CDS) is a credit derivative that can be used as insurance against a reference entity's credit risk, where a reference entity is either a government or corporation that has issued debt. If a party owns equal amounts of bonds and CDSs for a particular reference entity, then the party is completely insured against a negative credit event. However, unlike insurance, it is possible to own more of the CDS protection than of the underlying bond. In this way, CDS contracts make it possible to trade on an entity's credit risk without having exposure to the entity's actual bonds.Figure 1 summarizes how CDS contracts work. A CDS contract is a bilateral agreement between a protection seller and a protection buyer. The former is taking a short position in the CDS, while the latter is taking a long position. The protection seller compensates the protection buyer if there is a credit event with respect to any of the bonds issued by the contract's reference entity. Credit events include bankruptcy, failure to pay, and restructuring, among others. In exchange, the protection buyer makes periodic interest payments to the protection seller until the contract expires.