User FAQs

1) Can you describe a Total Return Swap ?
This is a type of credit derivative.
An agreement between two parties to swap the total return from an underlying asset for a regular fixed or floating cash flow.
This involves owning (or buying) an underlying asset and then selling the total returns.
This instrument lets you get exposure to and benefit from an underlying asset without actually owning it or having it on your balance sheet.
Equity - single stock, index (dividends, capital gains)
Bond - (coupons)
Loan -
Commodity -

2) Can you describe a Partial Return Swap ?
This is a type of credit derivative.
Exactly the same as a total return swap except it only gives exposure to a percentage of the total return.

3) Can you describe a Reverse Total Return Swap ?
This is a type of credit derivative.
This involves selling the underlying asset and buying the total returns.
Typically for equities.

4) Can you describe the different types of Single Name Credit Derivatives ?
Floating Rate Note -
Credit Linked Note -
Credit Default Swap (single name)
Credit Default Index Swap -
Credit Default Option -
Total Return Swap -
Credit Spread Option -
Asset Swap -
Asset Swap Spread -
Options on Credit Default Swaps (single name)
Options on Credit Default Index Swaps -
Credit Spread Forward -
Synthetic Collateralized Debt Obligation -
Credit Index Futures

5) What exchanges are Credit Derivatives traded on ?

6) What is a Credit Linked Note ?
They are structured instruments that pay a floating interest rate linked to a market rate such as LIBOR.
They also have an embedded credit default swap that protects you from certain credit events.

7) What is a Credit Default Swap ?
This is an agreement in which one party buys protection against losses occurring due to a credit event of a reference entity up to the maturity date of the swap.

8) What is a Credit Default Index Swap ?
This is a credit derivative that is standardised
There are two different types of corporate CDS indices:
CDX - contain north american companies and emerging market companies
iTraxx - contain companies from the rest of the world

9) What is a Total Return Swap ?
Transfers both credit and market risk.

10) What is an Asset Swap ?
This is the combination of a defaultable bond with a fixed-for-floating interest rate swap.

11) What is the Cumulative Default Probability ?
The credit spread on a 4 year bond is 0.2% an annum.
What is the cumulative default probability of the bond (to 2 dp)
P = 1 - e-yt (where y = premium (credit spread) snd t = no of years)
P = 1 - e-(0.002 * 4)
P = 1 - 0.9920
P = 0.007968
P = 0.80%