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Buyer purchased a credit default swap (CDS) at time t0 and makes regular premium payments at times t1, t2, t3, and t4. If the associated credit instrument suffers no credit event, then the buyer continues paying premiums at t5, t6 and so on until the end of the contract at time tn. |
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However, if the associated credit instrument suffered a credit event at t5, then the seller pays the buyer for the loss, and the buyer would cease paying premiums to the seller. |
Monday, May 21, 2012
Wikipedia
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A credit default swap (CDS) is a financial swap agreement that the seller will compensate the buyer in the event of a default.
ReplyDeleteA default is often referred to as a “credit event” and includes such events as failure to pay, restructuring and bankruptcy, or even a drop in the borrower’s credit rating. CDS contracts on sovereign obligations also usually include as credit events repudiation, moratorium and acceleration. Most CDSs are in the $10–$20 million range with maturities between one and 10 years. Five years is the most typical maturity.
By the end of 2007, the outstanding CDS amount was $62.2 trillion, falling to $26.3 trillion by mid-year 2010 but reportedly $25.5 trillion in early 2012.
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