[{"data":1,"prerenderedAt":-1},["ShallowReactive",2],{"detail-sidebar-cat-0-en-105":3,"doc-seo-321223-105":59,"doc-detail-321223-en":130},{"code":4,"msg":5,"data":6},0,"success",[7,13,18,23,28,33,38,43,48,51,55],{"id":8,"doc_module":4,"doc_module_name":9,"category_name":10,"show_sort_weight":11,"slug":12},1,"Document","Story & Novel",90,"story-novel",{"id":14,"doc_module":4,"doc_module_name":9,"category_name":15,"show_sort_weight":16,"slug":17},2,"Literature",80,"literature",{"id":19,"doc_module":4,"doc_module_name":9,"category_name":20,"show_sort_weight":21,"slug":22},4,"Exam",70,"exam",{"id":24,"doc_module":4,"doc_module_name":9,"category_name":25,"show_sort_weight":26,"slug":27},5,"Comic",60,"comic",{"id":29,"doc_module":4,"doc_module_name":9,"category_name":30,"show_sort_weight":31,"slug":32},6,"Technology",50,"technology",{"id":34,"doc_module":4,"doc_module_name":9,"category_name":35,"show_sort_weight":36,"slug":37},7,"Healthcare",40,"healthcare",{"id":39,"doc_module":4,"doc_module_name":9,"category_name":40,"show_sort_weight":41,"slug":42},8,"Research & Report",30,"research-report",{"id":44,"doc_module":4,"doc_module_name":9,"category_name":45,"show_sort_weight":46,"slug":47},9,"Religion & Spirituality",20,"religion-spirituality",{"id":46,"doc_module":4,"doc_module_name":9,"category_name":49,"show_sort_weight":46,"slug":50},"World Cup","world-cup",{"id":52,"doc_module":4,"doc_module_name":9,"category_name":53,"show_sort_weight":52,"slug":54},10,"Lifestyle","lifestyle",{"id":56,"doc_module":4,"doc_module_name":9,"category_name":57,"show_sort_weight":24,"slug":58},19,"General","general",{"code":4,"msg":60,"data":61},"ok",{"site_id":62,"language":63,"slug":64,"title":65,"keywords":66,"description":67,"schema_data":68,"social_meta":123,"head_meta":125,"extra_data":127,"updated_unix":129},105,"en","credit-default-swaps-and-their-market-function","Credit Default Swaps and Their Market Function","","Explains how credit default swaps (CDS) separate or redistribute credit (default) risk from bond portfolios, letting investors hedge, speculate, and adjust exposure while providing institutions with fee-based income. Describes major market functions since the 1997 invention and highlights how limited transparency and regulation contributed to systemic stress during the 2008 Lehman Brothers and AIG episodes. Introduces the core mechanics of CDS pricing, spreads, and settlement methods, including physical delivery and cash settlement based on recovery values.",{"@graph":69,"@context":122},[70,84,105],{"@type":71,"itemListElement":72},"BreadcrumbList",[73,77,79,82],{"item":74,"name":75,"@type":76,"position":8},"https://docshare.wps.com","Home","ListItem",{"item":78,"name":9,"@type":76,"position":14},"https://docshare.wps.com/document/",{"item":80,"name":40,"@type":76,"position":81},"https://docshare.wps.com/document/research-report/",3,{"item":83,"name":65,"@type":76,"position":19},"https://docshare.wps.com/document/credit-default-swaps-and-their-market-function/321223/",{"url":83,"name":65,"@type":85,"image":86,"author":91,"headline":65,"publisher":94,"fileFormat":97,"inLanguage":63,"description":67,"dateModified":98,"datePublished":99,"encodingFormat":97,"isAccessibleForFree":100,"interactionStatistic":101},"DigitalDocument",{"url":87,"@type":88,"width":89,"height":90},"https://docshare.wps.com/thumbnails/credit-default-swaps-and-their-market-function/321223.png","ImageObject",300,407,{"name":92,"@type":93},"Liam","Person",{"url":74,"name":95,"@type":96},"DocShare","Organization","application/pdf","2026-10-30","2026-09-21",true,{"@type":102,"interactionType":103,"userInteractionCount":52},"InteractionCounter",{"@type":104},"ViewAction",{"@type":106,"mainEntity":107},"FAQPage",[108,114,118],{"name":109,"@type":110,"acceptedAnswer":111},"What is the primary market function of credit default swaps?","Question",{"text":112,"@type":113},"They allow market participants to separate, reduce, or accumulate credit (default) exposure in their portfolios. CDSs also enable hedging and speculation around credit conditions.","Answer",{"name":115,"@type":110,"acceptedAnswer":116},"Why can CDS markets create systemic risk?",{"text":117,"@type":113},"Because market opacity and insufficient regulation can prevent early warning about large, hidden exposures. This can amplify stress when major firms fail.",{"name":119,"@type":110,"acceptedAnswer":120},"How is a CDS premium (spread) determined?",{"text":121,"@type":113},"The premium, quoted as an annual payment in basis points, reflects the face amount of the reference entity’s debt being protected under a standard contract. The spread is tied to contract size and life.","https://schema.org",{"og:url":83,"og:type":124,"og:title":65,"og:site_name":95,"og:description":67},"article",{"robots":126,"canonical":83},"index,follow",{"doc_id":128,"site_id":62},321223,1790241544,{"code":4,"msg":5,"data":131},{"doc_id":128,"user_id":132,"nickname":92,"user_avatar":133,"doc_module":4,"category_id":39,"category_name":40,"doc_title":65,"doc_description":67,"doc_content":134,"file_id":135,"file_url":136,"file_type":137,"file_size":138,"view_count":52,"is_deleted":4,"is_public":8,"is_downloadable":8,"audit_status":8,"page_count":24,"language":139,"language_code":63,"site_id":62,"html_lang":63,"table_of_contents":140,"faqs":141,"seo_title":142,"seo_description":67,"update_tm":143,"read_time":144,"preview_page_count":4},8796095461564,"https://ap-avatar.wpscdn.com/davatar_155a257f0dc6eb9ab79c44ca47cae57d","## Credit Default Swaps andTheir Market Function\n\nKent Cherny and Ben R.Craig  \nCredit derivative instruments allow default risk to be segregated from debt of all kinds.They have granted investors theabity to hedge their portfolios and provided numerous institutons with a new soutce nf mcome.However,the marketfor credit defauit swaps is neither transparent nor regulated,perhaps underminng the stabity of the financial systemithas helped innovate.  \nIn the context of the current recession and the accompany-ing financial crisis,one hears of a vast number of innova-tions in the products that investors and banks can use forhandling various risks.Since the 1997 invention of thecredit default swap (CDS),assuming and removing credit(or default)risk from a portfolio of assets has become amajor risk management tool of the world's largest and mostdominant institutions,both financial and nonfinancial.  \nThe broad use of credit default swaps by market partici-pants has been an important development,and their widespread adoption and integration into financial markets hasfundamentally reshaped the risk managenent landscape ofdomestic and international finance.Yet the collapse of Leh-man Brothers in 2008 and the government bailout of theinsurer American International Group(AIG)revealed thesystemic risks that CDSs can pose in their current form.  \nIn the case ofAIG,the company's aggregate exposure tocredit derivatives was not revealed to the market and regu-lators until it was already on the verge of a CDS-inducedbankruptcy.The lack of sufficient transparency in thederivatives market and regulation prevented these warningsigns from being conveyed appropriately prior to nearcatastrophe.  \nMarket opacity played a role in the settlement of LehmanBrothers CDSs as well.The investment bank's bankruptcymeant that CDS sellers would be forced to pay out tens ofbillions of dollars,but it was unclear which sellers ulti-mately held the exposure,and whether they would be ableto pay given the stressed financial environment.Fortunately,the settlement did not breed further turmoil,but the cpisodehighlighted the danger of an opaque,unregulated marketfailing to operate under-and even contributing to-condi-tions of extreme systemic distress.  \nBy enabling investors to subtract or accumulate credit expo-sure in their portfolios,credit default swaps have provided avaluable function in markets and will likely continue to doso,albeit within a new regulatory structure.This Commeutayexplains how CDSs work,why they are useful for sheddingrisk or speculating on market conditions,and why CDSmarkets might need to be reformed.  \n## Defining a Credit Default Swap\n\nAt its most fundamental level,the CDS is analogous toan insurance contract,though it differs in ways that areimportant in understanding how they are used.An insur-ance contract might insure a homeowner by providing apayment in the event of a house fire.The homeowner payspremiums at set dates,and if a fire occurs,the premiumsstop and the insurance company pays the homeowner theclaim,which depends on the amount of damage done to thehouse.In the same way,a CDS \"insures\"the holder of thecontract against a corporate default.In exchange,the writerof the CDS contract receives \"premium\"payments.How-ever,the analogy with insurance extends only so far.Onemajor difference between the two contracts is that the CDScan be bought by a person who does not actually hold theunderlying assct (a bond).(Imagine trying to buy insurancefor a house that one does not own!)Consequently.the totalvalue of CDS contracts can (and frequently does)exceed theamount of outstanding debt being insured.  \nDefaults of corporations-called reference entities withregard to the CDSinstrument-are the most common eventsthese contracts are written against,but protection can alsobe bought against the default on the debt of sovereignnations,including the United States.  \nIn a typical transaction,the seller of the protection takes onthe credit risk associated w","cbCaiofnL2XpJlXI","https://ap.wps.com/l/cbCaiofnL2XpJlXI","pdf",1490749,"English","# Credit Default Swaps and Their Market Function\n# Defining a Credit Default Swap","[{\"question\":\"What is the primary market function of credit default swaps?\",\"answer\":\"They allow market participants to separate, reduce, or accumulate credit (default) exposure in their portfolios. CDSs also enable hedging and speculation around credit conditions.\"},{\"question\":\"Why can CDS markets create systemic risk?\",\"answer\":\"Because market opacity and insufficient regulation can prevent early warning about large, hidden exposures. This can amplify stress when major firms fail.\"},{\"question\":\"How is a CDS premium (spread) determined?\",\"answer\":\"The premium, quoted as an annual payment in basis points, reflects the face amount of the reference entity’s debt being protected under a standard contract. The spread is tied to contract size and life.\"}]","Credit Default Swaps and Their Market Function | PDF",1789958722,13]