CREDIT DERIVATIVES
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Risk Management (Elective) — CAIIB.
One-liners from this chapter
Free sample — 8 of 65 rapid-fire Q&A cards.
What is a credit derivative?
A credit derivative is a financial contract that allows one party to transfer credit risk of an underlying asset to another party without transferring the asset itself.
What is a credit event in the context of a CDS contract?
A predefined trigger event causing CDS payout to protection buyer.
What is a Credit Default Swap (CDS)?
A CDS is a bilateral contract where the protection buyer pays periodic premiums to the protection seller, who compensates the buyer if a specified credit event (such as default) occurs on the reference entity.
What is a single-name CDS?
A CDS referencing credit risk of one specific entity only.
What are the typical credit events that trigger a CDS payout?
Typical credit events include bankruptcy, failure to pay, obligation acceleration, obligation default, repudiation/moratorium, and restructuring of the reference obligation.
What is meant by 'reference obligation' in a credit derivative?
The specific debt instrument underlying the credit derivative contract.
What is the role of the protection buyer in a credit derivative transaction?
The protection buyer pays a periodic premium (spread) and transfers the credit risk of the reference entity to the protection seller, effectively hedging against default risk.
What is a CDS index?
A standardized contract referencing a basket of CDS on multiple entities.
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