1) 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
2) What exchanges are Credit Derivatives traded on ?
3) 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.
4) 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.
5) 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
6) What is a Total Return Swap ?
Transfers both credit and market risk.
7) What is an Asset Swap ?
This is the combination of a defaultable bond with a fixed-for-floating interest rate swap.
8) 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%
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