Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

CDS - Credit Default Swap

1,337 views

Published on

CDS definition. How does a CDS work?. CDS examples.

Published in: Economy & Finance
  • DOWNLOAD THAT BOOKS INTO AVAILABLE FORMAT (2019 Update) ......................................................................................................................... ......................................................................................................................... Download Full PDF EBOOK here { http://bit.ly/2m6jJ5M } ......................................................................................................................... Download Full EPUB Ebook here { http://bit.ly/2m6jJ5M } ......................................................................................................................... Download Full doc Ebook here { http://bit.ly/2m6jJ5M } ......................................................................................................................... Download PDF EBOOK here { http://bit.ly/2m6jJ5M } ......................................................................................................................... Download EPUB Ebook here { http://bit.ly/2m6jJ5M } ......................................................................................................................... Download doc Ebook here { http://bit.ly/2m6jJ5M } ......................................................................................................................... ......................................................................................................................... ................................................................................................................................... eBook is an electronic version of a traditional print book that can be read by using a personal computer or by using an eBook reader. (An eBook reader can be a software application for use on a computer such as Microsoft's free Reader application, or a book-sized computer that is used solely as a reading device such as Nuvomedia's Rocket eBook.) Users can purchase an eBook on diskette or CD, but the most popular method of getting an eBook is to purchase a downloadable file of the eBook (or other reading material) from a Web site (such as Barnes and Noble) to be read from the user's computer or reading device. Generally, an eBook can be downloaded in five minutes or less ......................................................................................................................... .............. Browse by Genre Available eBooks .............................................................................................................................. Art, Biography, Business, Chick Lit, Children's, Christian, Classics, Comics, Contemporary, Cookbooks, Manga, Memoir, Music, Mystery, Non Fiction, Paranormal, Philosophy, Poetry, Psychology, Religion, Romance, Science, Science Fiction, Self Help, Suspense, Spirituality, Sports, Thriller, Travel, Young Adult, Crime, Ebooks, Fantasy, Fiction, Graphic Novels, Historical Fiction, History, Horror, Humor And Comedy, ......................................................................................................................... ......................................................................................................................... .....BEST SELLER FOR EBOOK RECOMMEND............................................................. ......................................................................................................................... Blowout: Corrupted Democracy, Rogue State Russia, and the Richest, Most Destructive Industry on Earth,-- The Ride of a Lifetime: Lessons Learned from 15 Years as CEO of the Walt Disney Company,-- Call Sign Chaos: Learning to Lead,-- StrengthsFinder 2.0,-- Stillness Is the Key,-- She Said: Breaking the Sexual Harassment Story That Helped Ignite a Movement,-- Atomic Habits: An Easy & Proven Way to Build Good Habits & Break Bad Ones,-- Everything Is Figureoutable,-- What It Takes: Lessons in the Pursuit of Excellence,-- Rich Dad Poor Dad: What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not!,-- The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness,-- Shut Up and Listen!: Hard Business Truths that Will Help You Succeed, ......................................................................................................................... .........................................................................................................................
       Reply 
    Are you sure you want to  Yes  No
    Your message goes here
  • Be the first to like this

CDS - Credit Default Swap

  1. 1. Credit Default Swap (CDS) Finanzas Empresariales II Omar Pernas López-Sarry
  2. 2. U n i v e r s i d a d e d e S a n t i a g o d e C o m p o s t e l a 2 Index • Introduction • Credit Default Swap • Example • Conclusions • Bibliography
  3. 3. U n i v e r s i d a d e d e S a n t i a g o d e C o m p o s t e l a 3 Index • Introduction • Credit Default Swap • Example • Bibliography
  4. 4. U n i v e r s i d a d e d e S a n t i a g o d e C o m p o s t e l a 4 What’s a financial derivative? Derivatives are financial instruments whose payoffs derive from other, more primitive financial variables such as a stock price, a commodity price, an index level, an interest rate, or an exchange rate.
  5. 5. U n i v e r s i d a d e d e S a n t i a g o d e C o m p o s t e l a 5 Composition of global derivatives contracts by trading arrangement as at the end of 2014 by outstanding gross notional value
  6. 6. U n i v e r s i d a d e d e S a n t i a g o d e C o m p o s t e l a 6 How can derivatives be used? • Forwards and futures: to hedge an existing market exposure. • Options: to obtain downside protection to an exposure even while retaining upside potential. • Swaps: to transform the nature of an exposure. • Credit derivative: to obtain insurance against events such as default.
  7. 7. U n i v e r s i d a d e d e S a n t i a g o d e C o m p o s t e l a 7 Size of global OTC derivatives markets by outstanding gross notional value
  8. 8. U n i v e r s i d a d e d e S a n t i a g o d e C o m p o s t e l a 8 What’s gross notional outstanding value? Notional outstanding refers to the principal amount of the contracts. • If a forward contract calls for the delivery of 1,000 oz of gold at a price of $1,800/oz, the notional outstanding in the contract is $(1, 800 × 1, 000) = $1.80 million. • If an option gives the holder the right to buy 10,000 shares of Google at $500/ share, the notional outstanding in the contract is $(10, 000 × 500) = $5 million. • If a swap calls for the exchange of floating cash flows for fixed cash flows on a principal of $100 million, the notional outstanding in the swap is $100 million.
  9. 9. U n i v e r s i d a d e d e S a n t i a g o d e C o m p o s t e l a 9 What’s a credit derivative? Credit derivatives are derivatives written on the credit risk of an underlying reference entity. Isolate credit risk from other risks present in an asset. Are off-balance-sheet instruments.
  10. 10. U n i v e r s i d a d e d e S a n t i a g o d e C o m p o s t e l a 10 Isolation and separate trading of credit risk
  11. 11. U n i v e r s i d a d e d e S a n t i a g o d e C o m p o s t e l a 11 Credit Derivative Market Growth
  12. 12. U n i v e r s i d a d e d e S a n t i a g o d e C o m p o s t e l a 12 Types of credit derivatives • Credit Default Swap (CDS) • Total Return Swap • Constant Maturity Credit Default Swap (CMCDS) • First to Default Credit Default Swap • Portfolio Credit Default Swap • Secured Loan Credit Default Swap • Credit Default Swap on Asset Backed Securities • Credit default swaption • Recovery lock transaction • Credit Spread Option • CDS index products
  13. 13. U n i v e r s i d a d e d e S a n t i a g o d e C o m p o s t e l a 13 Index • Introduction • Credit Default Swap • Example • Bibliography
  14. 14. U n i v e r s i d a d e d e S a n t i a g o d e C o m p o s t e l a 14 CDS: definition A Credit Default Swap (CDS) is a kind of insurance against credit risk.
  15. 15. U n i v e r s i d a d e d e S a n t i a g o d e C o m p o s t e l a 15 How does a CDS work? Protection buyer (short position) Protection seller (long position) Bp per annum Contingent payment Credit event • Municipal bonds • Emerging market bonds • Mortgage-backed securities • Corporate debt Reference entity
  16. 16. U n i v e r s i d a d e d e S a n t i a g o d e C o m p o s t e l a 16 Three main types of CDS • Single name: The reference entity is an individual corporation, bank, or government. • Index: CDS referring to multiple constitutent entities in the index with each entity having an equal share of the notional amount. The degree of standardisation is highest for these contracts. • Basket CDS: CDS with more than one reference entity (typically between three and one hundred names). Specific types include first-to-default CDS, full basket CDS, untranched basket and tranched basket known as a synthetic CDO.
  17. 17. U n i v e r s i d a d e d e S a n t i a g o d e C o m p o s t e l a 17 Types of credit events • Bankruptcy: where the reference entity becomes bankrupt or suffers an analogous. • Failure to pay: where the reference entity fails to make a payment of interest or principal. • Obligation default: where the reference entity defaults on one of its obligations. • Repudiation/moratorium: where the reference entity repudiates or declares a moratorium over some or all of its debts. • Restructuring: where the reference entity arranges for some or all of its debts to be restructured causing a material change in their creditworthiness.
  18. 18. U n i v e r s i d a d e d e S a n t i a g o d e C o m p o s t e l a 18 CDS features Size Averaging $25 to $50 million per transaction. Time to maturity 1 to 10 years. Transaction method Direct contracting and trading between the seller and the buyer Guarantees required Not if rated >= AA Secondary market Existent Settlement Whole losses or gains at maturity Guarantying institution The own contracting parties Contract compliance Physical delivery or cash settlement
  19. 19. U n i v e r s i d a d e d e S a n t i a g o d e C o m p o s t e l a 19 CDS uses: hedging and Speculation • An individual or company that is exposed to a lot of credit risk can shift some of that risk by buying protection in a CDS contract. • CDS provide a very efficient way to take a view on the credit of a reference entity.
  20. 20. U n i v e r s i d a d e d e S a n t i a g o d e C o m p o s t e l a 20 CDS: Market risks • The market for CDS is OTC and unregulated. • Contracts often get traded so much that it is hard to know who stands at each end of a transaction. • Counterparty risk. • The possibility that a widespread downturn in the market could cause massive defaults and challenge the ability of risk buyers to pay their obligations. • Leverage.
  21. 21. U n i v e r s i d a d e d e S a n t i a g o d e C o m p o s t e l a 21 Index • Introduction • Credit Default Swap • Example • Bibliography
  22. 22. U n i v e r s i d a d e d e S a n t i a g o d e C o m p o s t e l a 22 AIG’s involvement in mortgage backed securities (MBS) Protection buyer: Lenders, investors Protection seller: AIG Bp per annum Contingent payment Credit event: Sub-prime crisis Reference entity Mortgage Backed Obligations (MBO) Returns on different tranches Borrowers Borrowers Principal + Interest $180 billion bailout
  23. 23. U n i v e r s i d a d e d e S a n t i a g o d e C o m p o s t e l a 23 The Big Short https://www.youtube.com/watch?v=Cxjdj5_ 5yNM
  24. 24. U n i v e r s i d a d e d e S a n t i a g o d e C o m p o s t e l a 24 CDS from business newspaper
  25. 25. U n i v e r s i d a d e d e S a n t i a g o d e C o m p o s t e l a 25
  26. 26. U n i v e r s i d a d e d e S a n t i a g o d e C o m p o s t e l a 26 The evolution of average 5-years weekly CDS spreads (bp) for strong- economy countries
  27. 27. U n i v e r s i d a d e d e S a n t i a g o d e C o m p o s t e l a 27 The evolution of average 5-years weekly CDS spread (bp) for PIIGS
  28. 28. U n i v e r s i d a d e d e S a n t i a g o d e C o m p o s t e l a 28 Index • Introduction • Credit Default Swap • Example • Bibliography
  29. 29. U n i v e r s i d a d e d e S a n t i a g o d e C o m p o s t e l a 29 Bibliography • The J.P. Morgan guide to credit derivatives • Credit derivatives: an overview, Federal Reserve of Atlanta • Derivatives in Financial Market Development, International Growth Centre, February 2013 • Credit Default Swaps and counterparty risk, European Central Bank, August 2009

×