Learning Quantitative Finance with R

Credit default swaps

In brief, a credit default swap (CDS) is used to transfer the credit risk of a reference entity (corporate or sovereign) from one party to another. In a standard CDS contract, one party purchases credit protection from another party, to cover the loss of the face value of an asset following a credit event. A credit event is a legally defined event that typically includes bankruptcy, failure-to-pay, and restructuring. The protection lasts until some specified maturity date. To pay for this protection, the protection buyer makes a regular stream of payments, known as the premium leg, to the protection seller. This size of these premium payments is calculated from a quoted default swap spread, which is paid on the face value ...