buyer of a
credit default swap receives credit protection, whereas the seller of
the swap guarantees the credit worthiness of the
doing this, the risk of default is transferred from the holder of the
fixed income security to the seller of the swap.
The main goal of
credit default markets is to establish market prices for a given
default risk. Credit default
contracts are also used as part of the mechanism behind many
collateralized debt obligations (CDOs).
What is a
Default Swap ?
|CDS prices are usually
quoted in basic points. A
CDS price of 100
BPS means that the credit insurer
will charge 1%
each year for covering the risk
default. Read more from: Wikipedia Investopedia The
: CDS prices can be a useful
analytical tool. However, it is important to recognize the potential
limitations caused by both their inherent volatility and incidence of
false positives during stress periods.