FINA2204 Derivative Products and Markets

Credit default swaps (CDSs) are derivatives or contracts that allow one investor to "swap" or offset another investor's credit risk. For example, if a lender is concerned about a borrower's loan default, the lender may use credit default swaps to offset or trade off that risk. ("TBIL.co", 2021)

The potential for noncompliance seen in the middle of the year may increase, and the firm's credit swaps price may drop if it does.

This increase, in turn, can lead to an increase in inflation due to an increase in the base rate, interest rate. ("Swaps data: record trading volumes in March - Risk.net", 2021)

While there are other means to mitigate risk such as syndicated loans, borrower diversification, third-party loan guarantees and letters of credit, the main advantage of credit derivatives is that you can buy and sell credit risk just like stocks. Market. Thus, speculators, market makers and brokers may benefit from credit derivatives without the initial risk to the issuer, which also explains the spread of the sell / sell price. (Fabbro, 2021)

This indicates that the credit derivatives market is alive and providing debt protection during the Corona 19 crisis. During the crisis, the credit swap index provides much more liquidity than a one-name swap, and the liquidity of the index is reflected very quickly. Investors may consider a trade-off between the exclusivity offered by single-name credit swaps and the liquidity benefits that the credit swaps index provides. (Staff, 2021)

References

Fabbro, D. (2021). The Australian Credit Default Swap Market | Bulletin – December Quarter 2011. Retrieved 15 April 2021, from https://www.rba.gov.au/publications/bulletin/2011/dec/6.html

Staff, R. (2021). Australia, New Zealand 5-year CDS hit record high - CMA. Retrieved 15 April 2021, from https://www.reuters.com/article/ba-markets-cds-australia-idINL387716020090303

Swaps data: record trading volumes in March - Risk.net. (2021). Retrieved 15 April 2021, from https://www.risk.net/comment/7544341/swaps-data-record-trading-volumes-in-march

TBIL.co. (2021). Retrieved 15 April 2021, from https://tbilco.com/..

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