credit default swap
Bond failure hedge
A credit default swap is a financial contract in which one party pays regular premiums to another in exchange for protection against a borrower's failure to repay debt.
If the borrower defaults, the protection seller compensates the buyer.
These instruments function like insurance on bonds or loans, though technically classified as derivatives.
Credit default swaps gained notoriety during the 2008 financial crisis, when massive positions in mortgage-backed securities unraveled: AIG's credit default swap exposure nearly collapsed the global financial system.
Other side in deals
- syntheticProduced artificially, not natural
- tranchePortion of grouped securities
- clearinghouseCentral settlement agency
- mark-to-marketValuing at current price
settlement · trigger · spread · basis point · confirmation · termination · restructuring · succession
Financial regulation legislation
- transparencyState of being see-through
- capital requirementsMinimum funds banks must hold
- BaselSwiss Rhine city
- AIGGlobal insurance conglomerate
Lehman Brothers · reform · reporting · standardization · exchange-traded · OTC · bilateral
Unproven theorizing or risky investment
- arbitrageExploiting price discrepancies
- long positionOwning an asset outright
- short positionSelling borrowed securities
- market makerTrader ensuring constant liquidity
Noncommittal maneuvering
- systemic riskEconomy-wide collapse potential
- correlationStatistical relationship measure
- contagionDisease spread by contact
- tail riskUnlikely extreme outcome probability
counterparty
Other side in deals
- syntheticProduced artificially, not natural
- tranchePortion of grouped securities
- clearinghouseCentral settlement agency
mark-to-market · settlement · trigger · spread · basis point · confirmation · termination · restructuring · succession · auction
Dodd-Frank
Financial regulation legislation
- transparencyState of being see-through
- capital requirementsMinimum funds banks must hold
- BaselSwiss Rhine city
AIG · Lehman Brothers · reform · reporting · standardization · exchange-traded · OTC · bilateral
speculation
Unproven theorizing or risky investment
- arbitrageExploiting price discrepancies
- long positionOwning an asset outright
- short positionSelling borrowed securities
market maker · liquidity · dealer · roll · curve · carry · convexity
hedging
Noncommittal maneuvering
- systemic riskEconomy-wide collapse potential
- correlationStatistical relationship measure
- contagionDisease spread by contact
tail risk · recovery rate · netting · margin
- exchangestrading, swap, barter, bartering, exchange rate
- financial contractsfutures contract, forward contract, insurance policy, derivative, annuity
- housing crisishousing bubble, housing crash, subprime mortgages, foreclosures, subprime loans
- derivativesderivatives, sequel, option, remake, spinoff
- tradingbid, buy, ask, sell, trading
- bondsbond, corporate bond, corporate bonds, government bond, municipal bond
credit default swapcash bond
credit default swapinsurance policy
Agreement guaranteeing financial protection
surety bond · guarantee · credit insurance · bank guarantee · letter of credit
credit, credits, credited, crediting, creditor, creditors, credible, incredible, credibility