Parties to CDS
In a CDS at least three parties are involved which are as follows:
i. The initial borrowers- It is also called a ‘reference entity’, which are owing a loan or bond obligation.
ii. Buyer- It is also called ‘investor’ is the buyer of protection. The buyer will make regular payment to the seller for the protection from default or credit event of reference entity.
iii. Seller- It is also called ‘writer’ of the CDS and makes payment to buyer in the event of credit event of reference entity. It receives a regular pay off from the buyer of CDS.
Example-
Suppose BB Corp. buys CDS from SS Bank for the Bonds amounting $ 10 million of Danger Corp. In such case, the BB Corp. will become the buyer, SS Bank becomes seller and Danger Corp. becomes the reference entity. BB Corp. will make regular payment to SS Bank of the premium and if Danger Corp. defaults on its debts, the BB Corp. will receive one time payment and CDS contract is terminated.
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