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CRMM-2-credit-derivatives-and-credit-linked-notes.html
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<!doctype html>
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<title>Credit Risk Measurement and Management | Chapter 2 | Credit Derivatives and Credit-Linked Notes</title>
<meta name="description" content="Financial Risk Manager Part 2 Study Materials">
<meta name="author" content="MacLane Wilkison">
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<section>
<h1>Chapter 2</h1>
<h3>Credit Derivatives and Credit-Linked Notes</h3>
<p>
<small>Created for <a href="http://alchemistsacademy.com">Alchemists Academy</a> by <a href="http://alchemistsacademy.com/about">MacLane Wilkison</a></small>
</p>
</section>
<section>
<h2>Introduction</h2>
<ul>
<li>Credit derivatives - bilateral derivatives contracts in which one party compensates another following an adverse triggering event</li>
<li>Credit protection buyers make periodic payments to protection sellers in exchange for compensation in the event of a default in the reference asset</li>
</ul>
</section>
<section>
<h2>Single-Name Credit Default Swaps</h2>
<ul>
<li>Payoff occurs if an eligible obligation issued by the reference name defaults</li>
<li>Cash-settled vs. physically-settled</li>
</ul>
<img src="images/CRMM2/single-name-credit-default-swap.png" alt="single-name credit default swap" />
<aside class="notes">
In a cash-settled CDS the protection seller makes a single cash payment to the protection buyer equal to the par value of the defaulted reference asset minus its current market price. A physically-settled CDS requires the protection buyer to deliver the defaulted reference asset to the protection seller in exchange for a fixed cash amount. The reference name is the legal entity corresponding to a specific issuer or obligor.
</aside>
</section>
<section>
<h2>Portfolio Credit Default Swaps</h2>
<ul>
<li>Entitles buyer to compensation following one or more defaults in a reference portfolio</li>
<li>Basket CDS - multiname protection</li>
<ul>
<li>N<sup>th</sup> to default CDS</li>
<li>Senior and subordinated basket CDS</li>
<li>Limits and attachment points</li>
<li>Correlation play</li>
</ul>
<li>Credit indexes</li>
</ul>
</section>
<section>
<h2>Other</h2>
<ul>
<li>Asset default swap (ADS)</li>
<li>Equity default swap (EDS)</li>
<li>Total return swap (TRS)</li>
<li>Credit-linked note (CLN)</li>
</ul>
<aside class="notes">
ADSs are single-name CDSs in which the reference name is a securitized product. EDSs are CDSs in which the reference asset is a stock. A TRS is a contract in which the protection seller pays LIBOR plus a spread and receives LIBOR plus a cash amount equal to all realized interest payments plus any change in market value on the reference asset. A CLN is the funded equivalent of a CDS, in which the money to cover the contingent payment has been set aside in advance.
</aside>
</section>
<section>
<h1>THE END</h1>
<h3><a href="http://alchemistsacademy.com">AlchemistsAcademy.com</a></h3>
</section>
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