Interview Questions
• What is credit default swap (CDS)? What is a credit derivative index?
Credit Default Swap: It is an OTC Credit Derivative. (Provides protection against specific credit events) [pic] ▪ [pic] [pic]
Total return swap: (provides protection against loss of value irrespective of cause). Two parties enter an agreement whereby they swap periodic payment over the specified life of the agreement. One party makes payments based upon the total return—coupons plus capital gains or losses—of a specified reference asset. The other makes fixed or floating payments as with a vanilla interest rate swap. Both parties' payments are based upon the same notional amount. The reference asset can be almost any asset, index or basket of assets.
Credit linked note: A debt instrument is bundled with an embedded credit derivative. In exchange for a higher yield on the note, investors accept exposure to a specified credit event. For example, a note might provide for principal repayment to be reduced below par in the event that a reference asset defaults prior to the maturity of the note.
The fundamental difference between a credit default swap and a total return swap is the fact that the credit default swap provides protection against specific credit events. The total return swap provides protection against loss of value irrespective of cause—a default, market sentiment causing credit spreads to widen, etc.
Most credit derivatives entail two sources of credit exposure: one from the reference asset and the other from possible default by the counterparty to the transaction
Credit Derivative Index: A credit default swap index is a credit derivative used to hedge credit risk or to take a position on a basket of credit entities. Unlike a credit default swap, which is an over the counter credit derivative, a credit default swap index is completely standardized credit security and may therefore be more liquid
Credit Default Swap: It is an OTC Credit Derivative. (Provides protection against specific credit events) [pic] ▪ [pic] [pic]
Total return swap: (provides protection against loss of value irrespective of cause). Two parties enter an agreement whereby they swap periodic payment over the specified life of the agreement. One party makes payments based upon the total return—coupons plus capital gains or losses—of a specified reference asset. The other makes fixed or floating payments as with a vanilla interest rate swap. Both parties' payments are based upon the same notional amount. The reference asset can be almost any asset, index or basket of assets.
Credit linked note: A debt instrument is bundled with an embedded credit derivative. In exchange for a higher yield on the note, investors accept exposure to a specified credit event. For example, a note might provide for principal repayment to be reduced below par in the event that a reference asset defaults prior to the maturity of the note.
The fundamental difference between a credit default swap and a total return swap is the fact that the credit default swap provides protection against specific credit events. The total return swap provides protection against loss of value irrespective of cause—a default, market sentiment causing credit spreads to widen, etc.
Most credit derivatives entail two sources of credit exposure: one from the reference asset and the other from possible default by the counterparty to the transaction
Credit Derivative Index: A credit default swap index is a credit derivative used to hedge credit risk or to take a position on a basket of credit entities. Unlike a credit default swap, which is an over the counter credit derivative, a credit default swap index is completely standardized credit security and may therefore be more liquid