1. Luke N. Helm BA 543 Spring 2011

2.  Definition  Terminology  History  The Credit Crisis and Current Events

3.  Credit default swaps transfer credit risk  Allow the bank to maintain ownership of the loan  Clean up the balance sheet to increase capital reserves  Discrete

4.  “The protection buyer pays a fee to the protection seller in return for the right to receive a payment conditional upon the occurrence of a credit event by the reference obligation or the reference entity.” (Fabozzi et al, 2010)

5.  Protection Buyer  Protection Seller  Reference Entity  Reference Asset or Obligation  Swap Premium  Basis Points  Spread

6.  Credit Event  Default on the loan  Eight events as defined by the 1999 ISDA Definitions  Payment  Physical Settlement  Cash Settlement

7.  Early 1990’s—Invented by Wall Street  1997—JP Morgan’s BISTRO product  1999—ISDA Definitions  2000’s—Market explodes  Unregulated, OTC

9.  2008—Credit Crisis  AIG, Lehman Brothers  Immediate calls for regulation  Dodd-Frank  2011  No real reform  Basis points for credit ratings  Greece

10.  “Credit default swaps are a type of credit insurance contract in which one party pays another party to protect it from the risk of default on a particular debt instrument. If that debt instrument (a bond, a bank loan, a mortgage) defaults, the insurer compensates the insured for his loss” (NY Times, 2011)

11.  Premiums  Protection from risk

12.  The protection buyer does not need to own the asset  No required reserves  The CDS can be sold with out consent of protection buyer

13.  Hedging  Speculation  Arbitrage

14.  Morgenson, G. (2008, February 17) http://www.nytimes.com/2008/02/17/busi ness/17swap.html?ref=creditdefaultswaps  Morrissey, J. (2008, March 17). Credit default swaps: The Next Crisis. Retrieved May 10, 2011, from Time magazine website:http://www.time.com/time/busin ess/article/0,8599,1723152,00.html  Credit Default Swap. (2011, May 23). Retrieved May 25, 2011, from Wikipedia website:http://en.wikipedia.org/wiki/Cred it_default_swaps  Fabozzi, F., Modigliani, F., & Jones, F. (2010). Foundations of Financial Markets and Institutions Fourth Edition. Boston: Prentice Hall.