Fictionary: Credit Default Swap

Credit Default Swaps are a financial contract whereby a buyer of corporate or sovereign debt in the form of bonds attempts to eliminate possible loss arising from default by the issuer of the bonds. These are extremely relevant today and it becomes essential to understand what these actually are and how they work. 

By Dharmik Madan | 3 min Read

A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a debt default (by the debtor) or other credit event. That is, the seller of the CDS insures the buyer against some reference asset defaulting.
For example, if a lender is worried that a borrower is going to default on a loan, the lender could use a CDS to offset or swap that risk. To swap the risk of default, the lender buys a CDS from another investor who agrees to reimburse the lender in the case the borrower defaults Most CDS will require an ongoing premium payment to maintain the contract, which is like an insurance policy.

In the News
Brazil”s country risk measured by the five year  Credit Default Swap reached it’s lowest level since  2013 . Brazil”s five year credit default swaps traded at 103.3 basis point . It is the lowest since January  2013
In 2010 Brazil had the good- paying seal that was granted by rated agencies S&P
, Fitch and Moody.  Recently S&P raised from stable to positive the outlook for brazil long term foreign currency rating . On the same day the central bank  of brazil had  cut the basic interest from  5% to 4.5% per year . The primary analyst for Brazil    said that  the rating can  be upgraded  before the usual  two year deadline if  the growth accelerates beyond the 2 % forecast.