Nov
07
2013

Credit Default Swap

Credit Default Swap (CDS): the origin of the Crisis the current financial crisis has put in check the global financial system questioning its legal structure and the products that originate from him. The more questioned the Credit Default Swap (CDS) for its complexity and its risk. Here is an introduction to this type of instruments. Who are the Credit Default Swap? How were they originated? What is your risk? They are the questions that investors are made today. Definition a derivative is an agreement of transfer of risk, whose value is derived from an underlying asset’s price. The underlying asset could be a physical product, a type of interest, shares of a company, a stock market index, a coin, or practically any other negotiable instrument in which two parties they agree.

In the market (OTC) a derivative is a bilateral, private and negotiated agreement that transfers the risk from one part to another. The CDS are used since 1990 and they were established as an assurance to the big oil companies after the Exxon Valdez spill, in 1989. Its ease of use and the lack of regulation made it the most popular instruments in the derivatives markets. During the first decade, however, remained virtually unknown, and the volume of operations not reached 200 billion dollars annually. Towards the end of the 1990s he drove amounts close to 500 billion dollars. The takeoff of the CDS is produced in 2003, so rapidly that the year 2007 reached the sum of us $45.500.000.000.000 (US$ 45.5 billion), far exceeding the traditional alternatives. The year 2008 reached its maximum level: 65 trillion dollars, 1.35 times the world’s economic production. The CDS took his greatest strength as a result of the bankruptcy of Lehman Brothers given the loss of confidence by agencies risk rating, by which; CDS became the reference for measurement of risk of investment in a country, company, or institution.

Risk of Credit Swap Default (CDS) Lo CDS are basically insurance contracts that were created in order to make various financial instruments in the event of non-payment by the investor. These insurance policies are normally applied to public debt, private debt and mortgage securities. They are banks, hedge funds, big insurance companies, etc. that sell such insurance to financial institutions who have purchased such debt assets and these entities will pay a premium for which ensure the return on their investments in case of default of the issuer. Thus, if the issuer of the debt bankruptcy, the entity that has hired the Credit Default Swap will recover its investment.

Comments are closed.