Potential Benefits of CDSs

Christopher L. Culp (), Andria van der Merwe () and Bettina J. Stärkle ()
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Christopher L. Culp: Johns Hopkins University
Andria van der Merwe: Johns Hopkins University
Bettina J. Stärkle: Compass Lexecon

Chapter Chapter 7 in Credit Default Swaps, 2018, pp 141-145 from Palgrave Macmillan

Abstract: Abstract Credit default swaps (“CDSs”) can benefit market participants in various ways. CDSs can benefit lenders to CDS reference entities in the credit risk management process. By supplementing loan sales and securitizations with another credit risk management tool, CDSs give lenders flexibility in choosing a preferred credit risk transfer solution, which can free up capital and facilitate additional lending to reference entity borrowers. CDSs can also benefit investors by enabling them to make synthetic investments in the unfunded reference entity’s bonds. Finally, CDS prices can provide useful information to CDS users and other market participants about the expected default risks, recovery rates, potential interconnectedness, and other aspects of underlying reference names. We discuss here these potential benefits of CDSs.

Keywords: Credit default swap; CDS; Loan sales; Loan securitization; Hedging; Risk transfer; Synthetic bond investment; Informational role of CDS spreads; Price discovery; Expected default rates; Recovery rates (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:pal:psircp:978-3-319-93076-3_7

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DOI: 10.1007/978-3-319-93076-3_7

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