Credit Default Swaps - Pricing, Valuation and Investment Applications: Application of Bloomberg CDS pricing tool
Seminar paper from the year 2010 in the subject Business economics - Investment and Finance, grade: 67%, University of Westminster (Westminster Business School), course: Financial Derivatives, language: English, abstract: “A credit default swap (CDS) is a bilateral agreement designed explicitly to shift credit risk between two parties. In a CDS, one party (protection buyer) pays a periodic fee to another party (protection seller) in return for compensation for default (or similar credit event) by a reference entity”. Credit Default Swaps (CDS) are by far the most popular credit derivatives and have proven to be the most successful financial innovation. The structure of CDS is somewhat similar to the insurance policy. The market of CDS has heavily expanded and is traded in Over-The-Counter (OTC) market. This essay will briefly address the structure and the market of CDS, outlining its common products usage by some large institutions. Following the review of financial structure and pricing of CDS. And finally, this essay will also evaluate the risk management and investment applications of such products.
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accrual Basket CDS Bear Stearns Bottoms up approach calculation cash settlement CDS contract CDS market CDS pricing CDS provides CDS spread Central Bank 2009 corporate bonds counterparty risk Credit Default Swaps credit derivatives credit event credit risk date d divided default event default occurs default payment default probability Default Swap CDS Deventer discount factor European Central Bank expected payments Figure financial crisis financial institutions huge Investment Applications ISDA standard CDS Kane and Turnbull Kolb and Overdahl Lehman Brothers management and investment marginal probability market participants Microsoft Excel model see Appendix no-arbitrage model Nomura Fixed Income Panagiotis Papadopoulos par value payment date payoff pays a periodic premium leg present value pricing of CDS probability model probability of survival protection leg protection seller PV of expected q(ti recovery rate reference entity defaults riskless days standard CDS converter structure survival probability systemic risk trillion underlying reference upfront value of CDS