A study on the regulatory outlook and determinants of CDS premiums

Abstract

Credit default swaps (CDS) are OTC contracts designed to risk transfer credit exposure from protection buyer to protection seller. Buyer of the contract pays CDS premium in exchange for a positive payoff when a defined credit event occurs. Contracts can be broadly of two types: 1. Single Name CDS (Contracts referring a specific entity), 2. Portfolio reference entity (Contracts referring to a basket of underlying securities) In essence, Protection seller often acts as a speculator or insurance agent replicating a long position in bonds. They are exposed to risks similar to that of creditors. This is in contrast to protection buyer replicating a short position on bonds.