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4. Ckotunterparty CrediteRiskle

  • CDS Example

    • Everything can be netted out

    • But each party only knows his obligations

I-Bank 1

I-Bank 4

  • CDS spiral

    • Banks’ concern about CPCR

    • Bought CDS protection

    • CDS spread widened

    • Rating agencies downgraded

    • Hurts bank’s cash flow

I-Bank 3

I-Bank 2

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