Credit default swap

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Credit default swap

A credit derivative contract between two parties where the buyer makes periodic payments (over the maturity period of the CDS) to the seller in exchange for a commitment to a payoff if a third party defaults. Generally used as insurance against default on a credit asset but can also be used for speculation.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

Credit Default Swap

A swap in which the buyer makes a series of payments and, in exchange, receives a guarantee against default from the seller on a designated debt security. That is, the buyer transfers the risk that a debt security, such as a bond, will default to the seller, and the seller receives a series of fees for assuming this risk. In some ways, a credit default swap is like insurance, but there are significant differences. Prominently, the buyer of the credit default swap need not own the underlying debt security. Thus, the buyer may be speculating on the potential for default on the designated security. Likewise, the seller is not required to have the cash available to pay the buyer in case the designated security does default. This lack of regulation has raised concern, especially during the late 2000s credit crunch.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved
References in periodicals archive ?
To purchase a credit default swap, the buyer makes "a single upfront payment, or possibly a series of payments, in exchange for the counterparty's obligation to make ...
The insurance business world piled in to insure all this stuff again with last time's catalyst - Credit Default Swaps. Whoever gets left holding the policy baby will be unable to pay out on them - it's just too much.
New users should educate themselves about the credit default swap market.
In 2007, the notional value (face value of underlying assets) of credit default swaps had reached $62 trillion, more than the combined gross domestic product of the entire world ($54 trillion), (104) although the actual amount at risk was only a fraction of that amount (approximately 3.5%).
If I were the risk manager of a publicly traded self-insurer, I would call the Security Fund to find out how credit default swaps could slash my collateral costs.
As in a house fire, where the insurance covers only the damage on the house, a credit default swap covers the "damage" caused by the default.
Now if you throw a credit default swap on, which you could buy cheaply from AIG, you can invest more of your depositors' money.
The Superintendent Goes to Washington--On October 14th New York Superintendent of Insurance Eric Dinallo spoke at a hearing in Washington held by the Senate Committee on Agriculture, Nutrition, and Forestry about credit default swaps. It seems odd that the testimony would come before that Senate committee in particular because these complex financial instruments have little to do with farming, nutrition or trees.
A credit default swap allows you to transfer this credit risk to another market participant for a price.
This report discusses (1) differences between the pricing of loan commitments and loans, and assesses data that are available about the trading of loan commitments; (2) the extent to which credit default swaps are used to reduce the credit risk from loan commitments, and what credit default swap prices indicate about the prices of loan commitments; and (3) differences between commercial and investment banks' accounting treatment of loan commitments, and the strengths and weaknesses of fair value accounting.
GFInet, a leading creator of independent online markets, has brought out its Credit Default Swap Mark-To-Market (MTM) service, making GFI's actual market price data available to the "mid-office" -- a layer between the trader and the back-end settlement systems -- for the first time.
Subordinated Notes (A-/Stable, the collateral asset) and Codelco (A-/Stable, the reference entity of the transaction's credit default swap); restructuring is selected as a credit event on Codelco in the transaction's credit default swap.

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