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Discuess the statement about the pricing, valuation and sensitivities of Credit default Swaps Spreads by presenting a critical r - Essay Example
Finance & Accounting
Pages 9 (2259 words)
Credit Default Swap (CDS) Name: Instructor: Course: Date: 1.0 Executive Summary This report examines credit default swap (CDS), which is a recent innovation in the management of credit risks. It is a critical review report which deals with pricing, valuation and sensitivities of CDS spreads…
Secondly, it presents a review of sensitivities and spillover effects on CDS spreads from bond, equity and options markets. Under this, the market that has the greatest influence is identified after considering statistical evidence from various sources. Finally, the report reviews credit default swaps in the context of monitoring sovereign risks in both developed and emerging market economies. This seeks to demonstrate how credit default spreads behave in tranquil and volatile market environments. In addition, the importance of CDS market development in emerging economies is also highlighted in this report. 2.0 Background Credit default spreads (CDS) are recent innovation in the management of credit risks. They have gained popularity in the management of both single name and sovereign debt risks. The market is valued based on information from related underlying equity, bond and their options markets. However, various challenges have been experienced when dealing with CDS markets. These challenges include pricing of CDS spreads, lack of exchanges for trading credit derivatives, manipulation of accounting information, among others. Pricing of the CDS spreads is not an easy task. Though various models have been put forward by many researchers, there is no universally accepted method of computing the price of CDS. ...
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