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Credit default swaps in their current form have existed since the early 1990s and increased in use in the early 2000s. By the end of 2007, the outstanding CDS amount was $62.2 trillion, [3] falling to $26.3 trillion by mid-year 2010 [4] and reportedly $25.5 [5] trillion in early 2012.
The option is usually European, exercisable only at one date in the future at a specific strike price defined as a coupon on the credit default swap. Credit default options on single credits are extinguished upon default without any cashflows, other than the upfront premium paid by the buyer of the option. Therefore, buying a payer option is ...
A credit default swap index is a credit derivative used to hedge credit risk or to take a position on a basket of credit entities. Unlike a credit default swap, which is an over the counter credit derivative, a credit default swap index is a completely standardized credit security and may therefore be more liquid and trade at a smaller bid–offer spread.
The Z-spread of a bond is the number of basis points (bp, or 0.01%) that one needs to add to the Treasury yield curve (or technically to Treasury forward rates) so that the Net present value of the bond cash flows (using the adjusted yield curve) equals the market price of the bond (including accrued interest).
The credit default swap or CDS has become the cornerstone product of the credit derivatives market. This product represents over thirty percent of the credit derivatives market. [5] The product has many variations, including where there is a basket or portfolio of reference entities, although fundamentally, the principles remain the same.
This is achieved by buying, for example, credit default swaps: this "CDS protection" applies in that its value is driven, also, by the counterparty's credit worthiness. [ 25 ] Hedges can also counter the variability of the exposure component of CVA risk, offsetting PFE at a given quantile.
Credit default swap-implied (CDS-implied) probabilities of default are based upon the market prices of credit default swaps. Like equity prices, their prices contain all information available to the market as a whole. As such, the probability of default can be inferred by the price.
A synthetic CDO is a variation of a CDO (collateralized debt obligation) that generally uses credit default swaps and other derivatives to obtain its investment goals. [1] As such, it is a complex derivative financial security sometimes described as a bet on the performance of other mortgage (or other) products, rather than a real mortgage security. [2]
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