Products
Credit Derivatives
Products that trade credit risk: how CDS work and are valued, CDS indices, and synthetic CDOs.
Introductory1 pagePractitioner3 pagesAdvanced2 pages
1CDS
- IntroductoryCredit Default Swaps (CDS)In a 10 billion yen example, the buyer pays 12.5 million yen every 3 months and gets 7 billion yen if a credit event sets the debt's price at 30% of face value.
- PractitionerCredit Events and SettlementA typical CDS on a company uses bankruptcy, failure to pay, and restructuring as its three credit events.
- PractitionerPricing a CDSThe protection leg is the present value of the notional × (1 − recovery rate) received on default.
- PractitionerCDS Indices (iTraxx, CDX)A single trade lets you buy or sell the credit risk of many reference entities, and each constituent has an equal weight.
2Credit Exotics
- AdvancedFirst-to-Default BasketsAn FTD pays compensation at the first default and ends, so both the buyer's compensation and the seller's loss are capped at one name.
- AdvancedSynthetic CDOs and TranchesA tranche is a layer that absorbs portfolio losses from its attachment point to its detachment point, and losses hit the equity, mezzanine, and senior tranches in that order.