What is orphaned CDS?
An orphaned CDS is one where there are no deliverables, effectively making the CDS near worth less. In the case of Wind, the orphaning rumours are triggered by reports that the debt issued out of Wind Acquisition (the entity referenced by CDS) will be repaid and refinanced through a different entity.
How does a CDS contract work?
A credit default swap (CDS) is a financial derivative or contract that allows an investor to “swap” or offset his or her credit risk with that of another investor. 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.
How do you value a CDS contract?
The payoff from a CDS in the event of a default is usually equal to the face value of the bond minus its market value just after t, where the market value just after t is equal to recovery rate × (face value of the bond +accrued interest) (Hull and White,2000).
What is a CDS succession event?
Broadly speaking, a CDS Succession Event occurs if, when undertaking some form of corporate reorganization (like a merger or a spin-off), one entity becomes liable for the obligations of another, potentially requiring a change in the CDS contract’s Reference Entity and allocation of Relevant Obligations.
Are loans deliverable into CDS?
A bank, for example, may hedge its risk that a borrower may default on a loan by entering into a CDS contract as the buyer of protection. If the loan goes into default, the proceeds from the CDS contract cancel out the losses on the underlying debt.
What are credit events as per ISDA?
The three most common credit events, as defined by the International Swaps and Derivatives Association (ISDA), are 1) filing for bankruptcy, 2) defaulting on payment, and 3) restructuring debt. Less common credit events are obligation default, obligation acceleration, and repudiation/ moratorium.
What is a defaulted payment?
A default is a financial term, used when a credit agreement has been broken. If you’re unable to make payments or you don’t pay the right amount, your creditor may send you a default notice. If the default is applied, it could affect your credit file.
How are CDS prices used to measure credit risk?
If a credit event does occur during the term of the CDS, the entity providing compensation typically pays the other party the pre-agreed notional amount of the swap. The premiums at which CDS are traded provide information on the market’s assessment of credit risk, and hence the market’s willingness to supply credit.
Do credit default swaps still exist?
The payment received is often substantially less than the face value of the loan. Credit default swaps in their current form have existed since the early 1990s and increased in use in the early 2000s. CDSs are not traded on an exchange and there is no required reporting of transactions to a government agency.
Is the risk that a borrower will be unable to pay the contractual interest or principal on its debt obligations?
Credit risk is the possibility of a loss resulting from a borrower’s failure to repay a loan or meet contractual obligations. Traditionally, it refers to the risk that a lender may not receive the owed principal and interest, which results in an interruption of cash flows and increased costs for collection.
What triggers a credit default swap?
A credit event is a negative change in a borrower’s capacity to meet its payments, which triggers settlement of a credit default swap. The three most common credit events are 1) filing for bankruptcy, 2) defaulting on payment, and 3) restructuring debt.