After a long time I am putting few basic quiz questions, Lets check out who hit the bull’s eye. You can provide your answers by putting up the comments , there are only two questions but they will help to understand the basics OTC derivative market:
- What is correct about a credit default swap (CDS)?
- A CDS is the exchange of two cash flows: a fee payment and a conditional payment, which occurs only if certain circumstances are met.
- The CDS will have value for the protection seller only if defined credit conditions are met
- The protection seller will always receive the premiums.
- CDS is a type of insurance in which default of an asset triggers payment Continue reading “CDS & SWAPS”
There was a unique study done recently paper titled “MARKET EFFICIENCY AND DEFAULT RISK: EVIDENCE OF AN ANOMALY FROM THE CDS AND LOAN CDS MARKETS” by Lawrence Kryzanowski, Stylianos Perrakis and Rui Zhong.
The findings where significantly positive pricing-parity deviations from a simulated portfolio that simultaneously participates in opposite legs of the undervalued and overvalued contracts in the CDS and LCDS markets for exactly the same underlying firm, maturity, currency and restructure clauses. These deviations cannot be accounted for by trading costs, illiquidity or imperfect data about recovery rates in the event of default, suggesting segmentation between CDS and LCDS markets. Continue reading “Market Efficieny : Anomaly from CDS and Loan CDS”