Literature review - cds contracting and pricing

Assignment Help Finance Basics
Reference no: EM13654411

LITERATURE REVIEW

CDS Contracting and Pricing

A CDS is a contract between two parties: a protection buyer and a protection seller. The buyer makes periodic payments to the seller at a predetermined rate (known as the spread of the contract), which is quoted as basis points overa notional amount. The reference entity of the swap is usually a corporation or sovereign state with outstanding debt. The CDS spread has become an important indicator of credit condition, similar to the significance of the stock price, which reflects the fundamental value of the company. CDS contracts offered by various market makers have become almost identical in structure, allowing end users to simply shop for the best price. Therefore, generalizations of contract terms and relative efficient pricing have made CDSs the most actively traded product among credit derivatives.

In empirical investigations comparing equity variables with CDS spreads, for example, a significant negative relationship between the CDS spread and stock price has been documented by Jorion and Zhang [2007] and others. In addition to price and return, the impact of stock volatility on CDS spreads has also been proven in studies such as Hull et al. [2004a] and Ericsson et al. [2009]. Between CDSs and bonds, prior research has suggested that theoretical parity holds in the majority of cases for the two markets, with price discovery mainly taking place in the CDS market; see, for example, Hull et al. [2004b] and Longstaff et al. [2005]. When the CDS market is compared with the stock and bond markets together, the CDS market is found to be significantly more sensitive to the stock market than the bond market (Norden and Weber [2009]).

Verified Expert

Reference no: EM13654411

Different bonds can have different sensitivities to changes

Because of their differing durations, different bonds can have different sensitivities to changes in interest rates. Define Macaulay duration and effective duration. With thes

Calculate the value of the debt

Assume your ?rm has 20 shares of equity, a 10-year zero- coupon debt with a maturity value of $200 and warrants for 8 shares with a strike price of $25. Calculate the value

What is free cash flow for the current year

Class, XYZ Inc. has  the following info from the previous year: Net income = $4,000 NOPAT = $5,000 Total assets = $20,000 Total operating capital = $17,000 The info

Analyze the benefits of establishing solid financial acumen

Analyze the benefits of establishing solid financial acumen in a company. Describe personal experiences in one or two situations in which financial acumen was either not s

What will you pay for a share today

Antiques R Us is a mature manufacturing firm. The Company's last dividend was $9, but management expects to reduce the dividend payout by 4% per year indefinitely. The require

Difference between a secured loan and unsecured loan

Complete the Client Information Collection Tool using the information provided in the case study - Identify and describe the key factors that must be taken into consideration

Case study-sola systems

Define the business and costing object (usually a product, sometimes it may be the customer, product marketing, etc.). This process is very time-consuming - Discuss what "wr

One of the unique features of most recognized trades

One of the unique features of most recognized trades and vocations including the highly regulated accounting profession is the existence of code of ethics which are the hallma

Reviews

Write a Review

 
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd