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This assignment is about a financial instrument that is used to provide protection against credit risk. This instrument is call a credit default swap. The
This assignment is about a financial instrument that is used to provide protection against credit risk. This instrument is call a credit default swap. The need for the management of credit risk is widespread. The possibility of counterparty defaulting on a contract has been a risk that individual economic agents have been bearing since the history of mankind. This risk is a major financial friction that has to be considered in any type of business contract, from financial securities to employment contracts. Because this friction is costly financial innovation has taken place to deal with this frictionfinancial institutions have created contracts that allow for transferring and hedging of the risk of default by an individual economic agent. One such instrument as mentioned above is a credit default swap.
What are the benefits of the credit default swap for both the protection buyer and the protection seller. What does the credit default do Did the protection buyer eliminated its credit risk exposure overall? Who bears the credit risk? What is the periodic fee is designed to capture?
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