What Factors Determine Credit Default Swap Pricing?

Credit default swap (CDS), also known as credit default swap, is one of the most important credit risk mitigation tools for OTC transactions. It is a financial derivative product. Credit One of the derivatives. It can be viewed as a type of default insurance for financial assets. Creditors sell debt risk through CDS contracts, and the contract price is the premium. The party purchasing credit default insurance is called the buyer, and the party bearing the risk is called the seller. If the creditor incurs a violation of the rules and requires the principal of the debt to be recalled and requires early repayment, debt restructuring, etc.), the buyer regularly pays the "insurance fee" to the seller, and if a breach occurs, the seller bears the buyer's asset loss. ^[1]

Credit default swap

The contract is traded by two legal persons, one called the buyer (the party protected in the event of a credit default),

May trigger $ 234 billion credit default

Credit default swaps are measured in "basis points." 1 basis point represents $ 1,000 per year and can protect $ 10 million

CDS is one of the reasons why stocks in the New York Stock Exchange fell

Think of a Credit Default Swap (CDS) contract as

Since the summer of 2006, U.S. real estate prices have plummeted 25%, and $ 4 trillion in wealth has vanished. The two-family house, which operates at about 33 times the leverage, obviously cannot absorb the loss of this scale.

Credit default swap financial market

The problem of investment-grade credit default swaps is that the credit default swaps market has major institutional flaws. The size of 62 trillion US dollars has exposed the entire world financial market to an unprecedented and incalculable systemic risk. Among them, the biggest risk is that credit default swaps are completely over-the-counter transactions without any government supervision. Greenspan has repeatedly praised credit default swaps as a major financial innovation, which has dispersed US credit risk globally and increased the resilience of the entire financial system. He believes that banks are more motivated and capable than governments. I supervise the risk of credit default swaps, and therefore resolutely oppose the government's supervision of the financial derivatives market. However, the fact is that credit default swaps have developed into a ticking "financial nuclear bomb" that threatens the security of the world's financial markets at any time.

Central Clearing System for Credit Default Swaps

Another huge risk of credit default swaps is that there is no central clearing system, no centralized trading quotation system, no reserve guarantee requirements, no risk monitoring and tracking of homes, everything is in an opaque circle, with a kind of information The asymmetrical form works in order to maximize the returns for traders.

At the same time, credit default swaps have long ceased to be a conservative category for financial asset holders to purchase insurance for default risk, and it has actually alienated into gambling behavior between buyers and sellers of credit insurance contracts. In fact, both parties have nothing to do with the financial assets that need credit insurance. They bet on whether a credit default event occurs. This behavior and scale of gambling has far exceeded the original intention of the design of credit default swaps.