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Credit Default Swaps (CDS) /Options

Description

A pays B a regular premium (for a CDS)/one-off premium (for a option)

B pays A the credit-event payment if a credit event takes place on the reference entity

Result

A is short the credit risk of the reference entity

B is long the credit risk of the reference entity

Details

What is the credit-event payment?

What is the reference entity?

What is a credit-event?

Setting a price for the settlement: auction

Uses

As for TRS, BUT cleaner: no exposure to interest rate risk and no capital appreciation/depreciation adjustment

There are numerous variants on the CDS:

e.g. Constant Maturity CDS (CMCDS), Constant Spread Swap, Recovery Swap

Credit Derivative Instruments

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