Lately, all the media, as if a summer song it were, talk about the CDS often without really knowing what they are and what they represent.
These demonized by political monsters are financial derivatives, whose acronym respond to “Credit Default Swap” and are financial contracts that cover the risk of default on debt issued by companies or states.
Relatives of insurance by the fact cover a contingency in exchange for a premium, but with the difference that with these there is no obligation to hold the underlying (bond or loan), by which those who negotiate these contracts may be the margin covering the actual operation. (eg would be the equivalent of an insurance policy for a car that we possessed).
How do they work?
The buyer pays a premium to the seller quarterly and this in case of default of the underlying “insured” will give the amount of the debt in exchange for it, this settlement is usually done in cash.
Premiums ( “spread”) of CDS traded in financial markets with a figure representing an annual percentage of the amount the insured underlying (bond or loan) expressed in basis points (1 st. Basic = 0.01%). These contracts are huge and usually cover amounts of 10 to 20 M $ for a period of 1 to 10 years, which are only available to large investors.
CDS can be used for several purposes:
Speculative; investors can simply bet on the creditworthiness of a company or state and its possibility of bankruptcy or recovery.
Hedging ; Debt holders can cover the risk of default or bankruptcy. If it would occur no losses for the lender.
arbitration ; investors can take advantage of market inefficiencies occur. For example if it improves a company and its shares should decrease its CDS premium, since it reduces the risk of default or bankruptcy, if this does not happen in the long run this would be corrected.
Serve this introduction to understand the next evolution of the CDS of debt issued by Greece, Spain, Portugal and Ireland this year and as financial markets assess the risk of default or bankruptcy of the same graph.
Some may adhere to the theses trumpeted by German Chancellor Angela Merkel and published in the article Expansion: “Merkel announced a crackdown on speculators”
However, after observing the following table where a remarkable upturn seen in the price of the CDS even the strongest countries in the euro zone at low risk of default, others will point to the thesis defended by Marc Garrigasait in this interesting post: “there is only one in the world that can force politicians to stop make nonsense “ .