Options, Futures, Derivatives - School of Mathematics ：期权，期货，衍生产品——数学学院.pdfVIP

Lecture 14 Credit Derivatives Options, Futures, Derivatives / March 24, 2008 1 Credit Derivatives Credit derivatives allow companies to trade credit risks in the same way that they trade market risks. Companies can enter into credit derivative contracts to protect themselves from credit defaults of their lenders/borrowers. Options, Futures, Derivatives / March 24, 2008 2 Credit Default Swaps The most popular credit derivative is a credit default swap (CDS) • A CDS contract provides insurance against the risk of a default by a particular company. • The company is known as the reference entity and a default by the company is known as a credit event. • The buyer of the insurance obtains the right to sell bonds issued by the company for their face value when a credit event occurs • The sellers of the insurance agrees to buy the bonds for their face value when a credit event occurs. • The total face value of the bonds that can be sold is known as the credit default swap’s notional principal. Options, Futures, Derivatives / March 24, 2008 3 Features of a CDS • Buyers of a CDS makes periodic payments to the seller until the end of the life of the CDS or until a credit event occurs. • The payments are typically made in arrears every quarter, every half year , or every year. • The settlement, in the event of a default, involves either physical delivery of the bonds or a cash payment. Options, Futures, Derivatives / March 24, 2008 4 Example of a CDS Consider a typical d