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Credit Default Swap (CDS)

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In CDS contracts, what kinds of risks are CDS protection buyers exposed to? And what kinds of risks are CDS protection sellers exposed to?

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In CDS contracts, what kinds of risks are CDS protection buyers exposed to? And what kinds of risks are CDS protection sellers exposed to?

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Protection buyers and sellers are both exposed to the following risks:

-Counterparty risk: Protection buyers and sellers cannot fully assess the risk of counterparties because CDSs are over-the-counter products.

-Settlement risk: The terms of many credit derivatives specify physical delivery of the reference obligation on the occurrence of a credit event. The problem with settling CDSs in the wake of a credit event is a characteristic of derivatives in general: the notional value of CDSs outstanding is many times the trading volume of the underlying deliverable instruments. This led ...

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Danny Sava, PhD
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  • PhD, Capella University
  • MBA, Grantham University
  • BSc, Grantham University
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