hii

please explain in below....

:What are Sovereign CDS?

A:Credit Default Swaps (CDS) are contracts made by two market participants to either increase or reduce credit exposure to an entity - in this case a sovereign nation rather than a company.Quoted in basis points per year, a CDS price indicates the cost per year to either buy or sell exposure to the possibility of a sovereign defaulting or restructuring.Selling protection means you receive the premium every year of the contract but bear the risk of capital losses in the event of default; buying protection means that you pay the premium but will receive a payment equivalent to the losses suffered by bond holders in the event of default or restructuring.In other words sovereign CDS behave a little like insurance contracts - you can take the role of the insurer, or be insured.

why selling protection means receiving premium? buyer pays premiunm?

What happens after a credit event has taken place?

A:The investor who has bought protection through a CDS contract needs to receive a payment equivalent to the face value of the contract that they have entered into, less any recovery on the bond.So, let's assume that Country X misses a bond coupon, and its bonds fall to 20 cents in the dollar.There are two ways of settling the contract - physically or simply as an exchange of cash.In physical settlement, I give the counterparty who sold me protection $100 nominal value of bonds for every $100 which I have insured.The counterparty gives me $100 in exchange.Thus if I own the bonds and have hedged them with CDS then although my bonds have fallen by 80%, I get my full face value back.If I have simply been speculating, then I can buy the distressed bonds in the market for 20, and sell them for 100 to my counterparty.Contracts will typically cash settle however - in this case there is an auction to set an observed market price for the distressed bonds and thus determine their recovery value.