Credit default swap
A contract in which the protection buyer pays a periodic premium and the protection seller pays out if the reference entity suffers a credit event. It transfers credit risk without trading the bonds.
Where you will meet it
Credit default swap appears in 15 learning outcomes on the CFA syllabus. A few of them:
- Explain collateralized debt obligations, the cash flows they generate and the risks involved
“A synthetic CDO takes credit exposure through credit default swaps rather than owning the bonds.”
- Set out what credit derivatives are and their main features
“The main example is the credit default swap.”
- Set out where information about risk can be found
“Regulatory filings, proxy statements and the financial press add more, and market data such as credit default swap spreads and equity volatility reflect how investors price risk.”
- Explain credit default swaps (CDS), covering index CDS as well as single-name CDS, and the terms that specify a particular CDS contract
“A credit default swap transfers the credit risk of a reference entity from the protection buyer, who pays a periodic premium, to the protection seller, who pays out if a credit event occurs.”
See also
Buying protection · Credit event
Practise it
Practise credit default swap until it is automatic: questions that explain every wrong option.
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