What is a Credit Default Swap? | CDS | Credit Derivatives
Source: YouTube · Patrick Boyle · published Apr 30, 2019 · 16:03
Credit default swaps (CDS) are financial derivatives that act as insurance against default risk, allowing institutions to transfer credit risk to other market participants 1:52. Created in the 1990s, CDS have become both essential risk management tools and controversial instruments due to their role in the 2008 financial crisis 7:47.
Key Takeaways:
• CDS were pioneered by Blythe Masters at JP Morgan in 1994 when the bank needed protection against a $4.8 billion credit line to Exxon after the Valdez oil spill 0:33.
• A CDS contract involves a buyer making periodic payments to a seller who agrees to compensate the buyer if a credit event like bankruptcy or failure to pay occurs 1:52 and 5:12.
• Banks are major buyers of CDS to hedge their loan books, while insurance companies are typically sellers, with most contracts lasting five years 5:08.
• Critics argue CDS can lead to inadequate credit assessment and potentially allow investors to benefit from pushing companies into bankruptcy, contributing to market instability 11:01.
Despite their controversy following the 2008 financial crisis, CDS remain important tools for managing credit risk in financial markets, subject to increased regulation and oversight 7:47.
Sources:
- 0:33 Creation of CDS by Blythe Masters at JP Morgan
- 1:52 How CDS work as insurance
- 5:12 Credit events triggering CDS payouts
- 5:08(https://www.youtube.com/wat
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Transcript Preview
First 800 characters of the transcript
Hello and welcome back to my YouTube
channel, where I upload tutorials on quantitative finance and derivatives
usually in short bite-sized format to help people understand the important
financial topics. Today we're going to learn all about CDS or credit default
swaps why they exist what they're used for and how they are structured this is
video 3 in my series on credit derivatives if you want to watch the
whole series a link to the playlist is provided above ok so firstly let's
answer the question what are credit default swaps Blythe Masters who you can
see on screen right now is widely credited with creating the modern credit
default swap when she worked at JP Morgan. She became a managing director at
the age of 28 the youngest woman to achieve that status in the firm's
history. In 1994 …