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CDS - Coggle Diagram
CDS
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Credit derivatives are derivative instruments in which the underlying is a measure of a borrower’s credit quality.
CDS provides protection against default, but also protects against changes in credit quality well in advance of default.
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Types of CDS
Single-name CDS
Single-name CDS is a CDS on one specific borrower (reference entity), and the contract specifies a reference obligation, usually senior unsecured debt.
Cheapest-to-deliver (CTD): can be purchased and delivered at the lowest cost but has the same seniority as the reference obligation
Index CDS
Index CDS is involves a portfolio of single-name CDS:
• Protection for each issuer is equal (i.e., equally weighted).
• Total notional principal is the sum of the protection on all the issuers.
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Credit valuation adjustment is the sum of the present value of the expected loss for each period → The best estimate of the value of the hedging instrument to cover the risk of the protection seller.Sum of PV of expected loss (CVA)
CDS spread (premium) is the return over a market reference rate required by the protection seller to protect the buyer against credit risk.