Credit Swap ( credit default swap ) – What Are They All About?
Credit swap, also called as credit default swap, was one of the most popular swapping in the financial sector until the economy of the United States crashed. Like all other swaps, credit swap is also an agreement between two counterparties. In a way, credit swap functions like an insurance policy and provides protection to the lending body. The date of maturity and other key concepts can be decided between the two bodies.
However, in case the economy goes bust and the party that swapped loans cannot pay the lending body, then the total financial machinery collapses. While this kind of credit swap is very useful in a lot of instances because it provides security to the lender of loans, it can become a ticking time bomb if the other counter party goes bankrupt and is unable to pay. A classic example is the recent crash down of American real estate market, as is elucidated below. Details
Tags: Credit Risk, Financial Asset, Market Risk