A Credit default Swap (CDS) is a credit derivative for acting loss risks credits and the like, e.g. loans.

The safeguard taker pays a unique or regular (frequently annual or half-yearly) fee and keeps paid off in case of one credit event, thus for example to the loss of the repayment due to insolvency of the debtor, which can be defined, a contractually agreed upon sum. A CDS can refer thereby in principle to an individual credit or to a whole Kreditportfolio.

The above diagram represents schematically the payment rivers of a Credit default Swaps for the scenario of the entrance of the loss event. At the time t0 the Credit default Swap is locked. Thereupon the safeguard taker pays the safeguard premium at the agreed upon times (T1 to t6) to the safeguard giver. At the time t5 the loss event occurs. The safeguard giver makes the contractually agreed upon payment to the safeguard taker.

The CDS works like an insurance for the Forderungsportfolio. Thus banks and credit givers receive a flexible instrument, in order to be able to transfer credit risks at investors, while for investors a new plant class is opened. The CDS covers however only the loss risk, however not the Spread risk or the market price risk.

Additionally the risk exists for the safeguard taker that the safeguard giver cannot make the agreed upon payment with entrance of the loss event.

Since 1999 CDS standard agreements of that exist internationally to Swaps and of derivative Association (ISDA).

Similarly goals as with Credit default Swaps can be achieved also with Credit Linked Notes.

Related links

• Internationally Swaps and of derivative Association (ISDA)

Articles in category "Credit default Swap"

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