0
A naked CDS is the purchase of CDS's without an investment in the underlying asset. Essentially buying insurance without the asset. Usually linked with speculation in the creditworthiness of the company. Speculators trade the likelihood a company will default on its payments.
What else can I help you with?
What is the minimum amount for a party to enter into a credit default swap?
There is no "minimum amount" required for a party to enter into a credit default swap. The market for CDS products varies and terms are set by both parties agreeing to enter into the transaction.
What is the difference between IRS and cds?
Both Interest rate swap and Credit default swap carries a different kinds of inherent risks. In IRS two parties involved together to swap the fixed rate v/s floating rate of swaps or vice versa whereas in CDS it is more like Default insurance where the purchase of CDS pays a regular premium to the seller of the instrument in return for a guarantee of payment in event of fixed assets turns sour.
What is a CDS?
The acronym CDS is a credit default swap. A financial term for a derivative contract whereby one party buys protection against the default of a reference credit and the other counterpary sells the protection, i.e. agrees to receive periodic payments in exchange for providing insurance against the default of an obligor.The acronym CDs is the plural form for compact disk and certificate of deposit.
What is a credit default swap?
I would recommend reading the article "The Price of Greed" in the Sept 29 issue of Time magazine. CDS's are derivatives, sold by AIG, designed to protect investors from failures of other companies. Time calls them "pixie-dust" securities that supposedly offer insurance against a company defaulting on its obligations. They are collaterized, which is where AIG got into trouble when their credit rating was downgraded. The required additional collaterial was nowhere to be found. A CDS is essentially an insurance policy for credit derivatives. It's not technically insurance for quite a few reasons, chief among them being that, as derivatives, the sellers aren't regulated nor are they required to maintain reserves enabling them to pay off the buyers if the underlying securities default, and the buyer of a CDS doesn't need to own the derivative he's insuring. These are the "naked CDS." I have written extensively on the evil that is the naked CDS, usually comparing it to naked fire insurance. If they sold that product, very little would prevent the naked fire insurance holder from going over to his neighbor's house and setting it on fire so he could collect. AIG was the leader in the naked CDS and a very large player in clothed CDS, In ten years, when the dust has settled, we'll all look back and think, "who thought THIS was a good idea?" Until then the naked CDS stands as prima facie evidence that deregulating the derivatives market was a really stupid idea.A credit default swap (CDS) is a credit derivative contract between two counter parties, whereby the buyer makes periodic payments to the seller in exchange for the right to a payoff if there is a default or credit event in respect of a third party or reference entity.A credit default swap (CDS) is a swap contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if a credit instrument (typically a bond or loan) goes into default or on the occurrence of a specified credit event (for example bankruptcy). Credit Default Swaps can be bought by any investor; it is not necessary for the buyer to own the underlying credit instrument.A CDS is like a Health insurance policy that we may take to cover up for the cash requirements if we get any health problems. We pay a premium to the insurance company and if we get any health problems, the insurer would pay for the medical treatment. Here are the differences between credit default swaps and "traditional" insurance, according to Wikipedia: * the seller need not be a regulated entity; * the seller is not required to maintain any reserves to pay off buyers, although major CDS dealers are subject to bank capital requirements; * insurers manage risk primarily by setting loss reserves based on the Law of large numbers, while dealers in CDS manage risk primarily by means of offsetting CDS (hedging) with other dealers and transactions in underlying bond markets; * in the United States CDS contracts are generally subject to mark to market accounting, introducing income statement and balance sheet volatility that would not be present in an insurance contract; * Hedge Accounting may not be available under US GAAP unless the requirements of FAS 133 are met; in practice this rarely happens; * The buyer of a CDS does not need to own the underlying security or other form of credit exposure; in fact the buyer does not even have to suffer a loss from the default event.[2][3][4] By contrast, to purchase insurance the insured is generally expected to have an insurable interest such as owning a debt. The last one is the most important here. Think of fire insurance. They don't allow people to purchase fire insurance on other people's buildings for the obvious reason: people would insure the worst firetraps in town, then go around burning them down to collect the insurance settlements. OTOH, you can buy CDS contracts on derivatives you don't own and never will--essentially betting that the underlying derivative is going to fail. Here's an example: You are the CEO of the biggest factory in the state, and you're getting ready to move your operations to Vietnam--which is going to put a few thousand people out of work. You could use your contacts in business to find out where your employees' mortgages are tranched (read up on structured financing), and buy naked CDS on those tranches. If you're the only one in town that pays decently, a lot of your employees are going to lose their homes, and you'll be in fat city when it happens. Right now you should be thinking, my but that would be a vicious thing to do. Yes it would, but so would closing your factory because you can get kitchen utensils made in China for two percent less than you're making them in the US, and that happens all the damn time.
What is the difference between a CDO and a CDS?
CDOs assemble an entire portfolio of credit risk exposures, segment that exposure into tranches with unique risk/return/maturity profiles, which are then transfered or sold to investors. A CDO's reference (underlying) portfolio can be assembled with physical cash flow assets such as bonds, loans, MBS, ABS etc., or with synthetic credit risk exposures: synthetic CDOs are backed by a portfolio of credit default swaps (CDS). alternatively: CDSs are swap contracst and agreements in which the protection buyer of the CDS makes a series of payments (often referred to as the CDS "fee" or "spread") to the protection seller and, in exchange, receives a payoff if a credit instrument (typically a bond or loan) experiences a credit event. It is a form of reverse trading.
What is the purpose of CDS spreads?
CDS spreads is a financial agreement swap. The purpose is sort of like trading or buying. They swap with different companies to gain and give for the best of both.
What could lehman brothers have done not to be affected by recession?
They could have reduced their exposure to complex derivative products like MBS, CDS, CDO's etc. MBS - Mortgage backed securities CDO - Collateralized debt obligations CDS - credit default swaps
What is meant by credit trading?
is speculating on the credit worthiness, risk of default including financial worth of an entity. It can be classified in a few groups: trading in Sovereign, Corporations, or credit index. It can involve trading in the fixed income and CB market in a broad range of products, mostly CDS or credit default swaps. A common reason for this type of trading is being able to hedge company risk on the back of another investment.
How much money was made in credit default swaps?
The exact amount made in credit default swaps (CDS) can vary significantly over time and is influenced by market conditions. At their peak before the 2008 financial crisis, the market for CDS reached around $60 trillion in notional value. However, the actual profits or losses realized from these contracts depend on various factors, including defaults of underlying securities and market movements. Overall, while CDS can generate substantial profits for some investors, they also carry significant risks.
What is a mortgage default swap?
I believe you are asking about credit default swap. Say I have a bank, and I have a certain risk or exposure of losing money on bad home loans, I may look for someone I can pay, to guarantee the repayment. I'm the buyer of "credit protection" and the seller now has assume the risk of the bad loans. Now, the insurance analogy is quite clear. It may appear that since I bought credit protection, the loans I hold are worth more. This works so long as the seller of the swap has the cash to make good in case of non-payment (default). The swap seller has to consider the percent of loans he might have to pay out on. He sets the swap price for the "credit protection" accordingly. But, here's the rub- he may have a lot of statistics on the percent of bad loans, and the number will be very low, say 0.5%, but that's in the housing boom times. In good times, home owners without the income to pay simply re-finance with the added equity in their homes. They tap into their credit cards for quick cash. Obviously, in bad times, the swap seller runs short of money to guarantee the loans. The buyer of the swap is now in the hole too. His credit rating drops as the swaps no longer offer same protection. There is also the concept from statistics that if there are many loans involved, then the risk should be more accurately factored into the price, as averages tend toward the population mean as the sample size increases. Unfortunately, the population mean (strictly just a concept) in this situation is not stationary (fixed in time). As one economist put it, you can't make a bad loan into a good loan with insurance or swaps. The swap moved the credit risk exposure from one institution to another. In good times, it was win-win for buyer and seller. In bad times, we have lose-lose. While the swaps have similarity to insurance, it's not like fire or theft insurance as all the fraction of houses on fire or being broken into does not suddenly rise. This is referred to as systemic risk in the credit default swaps. See more: http://www.investopedia.com/terms/c/creditdefaultswap.asp Also, Wikipedia has a good description of credit default swaps. It's a complicated area and I would appreciate anyone with experience in this area who can add to this. Some extra points to add on to this: 1. With CDS the banks expected the risk of loan defaults to be transferred to the Insurance Provider. When a default would occur they would go to the Insurance provider and get the loan default amount 2. The Insurance provider did not expect a whole group of population to surrender their homes and close their mortgage loans. When the default rate on the loans in the bank increases, the collateral or the security amount the Insurer has to place as amount for credit protection increases. When the defaults increased many fold the swap providers were unable to increase the credit protection amount. This is why AIG went broke and the US government had to pitch in to help it...
How do CDs help build credit?
CDs, or certificates of deposit, can help build credit indirectly by demonstrating responsible financial behavior. When you open a CD, you are showing that you can save money and commit to a fixed term. This can reflect positively on your creditworthiness and may help improve your credit score over time.
How does a CPDO work?
A CPDO (Constant Proportion Debt Obligation) is a structure investing in riskless assets (like government bonds and bills) and selling credit protection via Credit Default Swaps. The fees generated by selling credit protection are used to pay CPDO investors an interest rate above the risk-free one. The amount of protection sold is dynamically adjusted in order to keep the credit exposure constant. So, for example, when credit spreads rise (and the value of the outstanding CDS position drops), more credit protection is sold, in order to keep constant the value of the CDS position as a proportion of the portfolio . When the risky position generates enough returns to cover all future payments to CPDO investors, it is closed and all CPDO funds are invested in risk-free assets.
