Credit Default Swap (CDS)

A credit default swap (CDS) is a contract that protects against losses resulting from credit defaults. The transaction involves two parties, the protection buyer and the protection seller, and also a reference entity, usually a bond. The protection buyer pays a stream of premiums to the protection seller, who in exchange offers to compensate the buyer for the loss in the bond’s value if a credit event occurs. The stream of premiums is called the premium leg, and the compensation when a credit event occurs is called the protection leg. Credit events usually include situations in which the bond issuer goes bankrupt, misses coupon payments, or enters a restructuring process. Financial Instruments Toolbox™ software supports:

CDS Functions

Function

Purpose

cdsbootstrap

Compute default probability parameters from CDS market quotes.

cdsspread

Compute breakeven spreads for the CDS contracts.

cdsprice

Compute the price for the CDS contracts.

See Also

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Related Topics

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