The decline in credit default swaps
comes amid signs of a pick-up in world economic growth with the International Monetary Fund planning to raise its forecast in about three weeks, Managing Director Christine Lagarde said this week.
Conceived in the aftermath of Drexel Burnham Lambert's (20) creation of collateralized debt obligations (21) in the late 1980s, (22) a credit default swap
is a "promise[ ] to make a specified payment in the event a particular debt instrument experiences an event of default, such as a payment default or if the issuer files for bankruptcy protection." (23) In other words, credit default swaps
are "derivative instruments that seek to mitigate the risk of failure of a security through purchase of insurance against the occurrence of such event." (24) For example, suppose Sara purchases Company X's bonds but is worried that X may be unable to repay her according to the terms of her investment.
Lending money and then insuring against the possibility of default by the borrower - whether it's a business, individual, a sovereign state or a bank - creates the market of Credit Default Swaps
. And they're here again to haunt us.
EXHIBIT 1 Credit Default Swap
Prices for A-rated Debt, by Industry Sector, 9/27/10 Industry Credit Default Swap
Price Banks and Brokers 193 Other Financial 144 Basic Industries 73 Consumer 65 Note: Table made from bar graph.
In order to cover the risk of defaults on mortgages, particularly subprime mortgages, the holders of CDOs purchased credit default swaps
Rather, the California Self Insurer's Security Fund buys a credit default swap
(CDS) contract which will pay the fund if Macy's or one of its other hedged self-insureds declares bankruptcy.
CDS delivery option; better pricing of credit default swaps
Since the 1997 invention of the credit default swap
(CDS), assuming and removing credit (or default) risk from a portfolio of assets has become a major risk management tool of the world's largest and most dominant institutions, both financial and nonfinancial.
At the sitting of the ruling coalition Kubilius relied on Bloomberg's credit default swap
which indicates that the Lithuanian financial situation is improving for the third month in a row.
At the heart of AIG's problems is a financial product called a credit default swap
, which is really just an insurance contract on debt.
However, at least at this time, it appears that key congressional leaders may have different ideas about solutions to the problems that face the credit default swap
Credit markets in the GCC continue to develop, and the expansion of the Credit Default Swap
(CDS) market is the latest example.