How large is the credit default swap market?
The credit default swap (CDS) market, made notorious in the wake of the 2007–2009 fi- nancial crisis, is the third biggest over-the-counter derivatives market in the world, with $8 trillion notional value of outstanding CDS as of June 2018 (BIS, 2018).
What is CDS index factor?
A credit default swap index (or CDS index) is a credit derivative used to hedge credit risk or to take a position on a basket of credit entities or indexes. A CDS index is a portfolio of actively traded liquid names in a particular sector of the market.
WHAT IS curve in CDS?
A credit curve is a set of points indicating the spread on a CDS for different maturities. Each point belonging to the curve represents the spread that makes the present value of expected spread payments is equal to the present value of the payout in case of a credit event (fair pricing.)
How do you value CDS?
Valuation of a CDS is determined by estimating the present value of the payment leg, which is the series of payments made from the protection buyer to the protection seller, and the present value of the protection leg, which is the payment from the protection seller to the protection buyer in event of default.
What is single-name CDS?
A single-name CDS is a derivative in which the underlying instrument is a reference obligation or a bond of a particular issuer or reference entity. Credit default swaps have two sides to the trade: a buyer of protection and a seller of protection.
How do you hedge a CDS position?
To hedge risk, investors buy credit default swaps to add a layer of insurance to protect a bond, such as a mortgage-backed security, from defaulting on its payments. In turn, a third party assumes the risk in exchange for a premium.
Can CDS spread be negative?
“The [CDS] spread represents a premium paid by a buyer of protection, so it can’t be negative,” said Gavan Nolan, director of credit research at Markit.
What is CDS hazard rate?
The CDS worksheet shows that the hazard rate is 1.275%.
What is CDS bond basis?
The CDS-bond basis captures the relative value between a cash bond and CDS contract of the same credit entity. It is defined as an entity’s bond swap spread subtracted from its CDS spread.
Can I purchase credit default swaps?
The investor can buy a CDS from a bank that will pay out the value of that debt if Company A defaults. A CDS can be purchased even if the buyer does not own the debt itself.
How is CDS premium calculated?
The bank must pay an amount equal to 2% of the notional amount to the CDS seller each year. Annual premium amounts to $800,000 (2% × $40 million). If the borrower defaults on the final principal payment and the bank collects only 50% of its principal back, it can claim the differential from the seller of the CDS.
How do you value a CDS contract?
What is CDS cash basis?
The CDS basis is simply the difference between the spread an investor receives when owning a physical corporate bond, and the Credit Default Swap (CDS) of the same bond.
Who is the Markit CDS pricing director?
Nolan played a key role in developing the Markit CDS pricing product, the leading service in the CDS market. Prior to joining Markit in 2003, now IHS Markit, he worked at J.P. Morgan and TD Securities in a variety of fixed-income roles. Mr. Nolan holds a Bachelor of Science in Economics from Queen Mary College, University of London, UK.
What are the inputs supplied by Markit?
Index Name (Ticker/Company) (1) and Trade Level (4) All other inputs have default values supplied by Markit, including: Long Name (2) displays the Long Name of the Index; verify Tenor, Series and Version. Trade Date (3) defaults to today
What are IHS Markit CDs?
1. CDS index products are part of the wider IHS Markit credit index ecosystem that also includes tradable bond indices (iBoxx indices that are tracked by a number of large corporate bond ETFs) and related standardised total return swaps (iBoxx TRS, offered by a number of licenced market makers). 5
What is the CDS index options market?
In recent years, there has also been significant growth in the CDS Index Options market. CDS Index Options, or Swaptions, are contracts that promise the holder of the Swaption contract the right to enter into a CDS index position at option expiry at the specified strike level.