2009Economic Commentary (Federal Reserve Bank of Cleveland)Open access

Credit Default Swaps and Their Market Function

Kent Cherny, Ben R. Craig

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Abstract

Credit derivative instruments allow default risk to be segregated from debt of all kinds. They have granted investors the ability to hedge their portfolios and provided numerous institutions with a new source of income. However, the market for credit default swaps is neither transparent nor regulated, perhaps undermining the stability of the financial system it has helped innovate.

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Credit derivative instruments allow default risk to be segregated from debt of all kinds. They have granted investors the ability to hedge their portfolios and provided numerous institutions with a new source of income. However, the market for credit default swaps is neither transparent nor regulated, perhaps undermining the stability of the financial system it has helped innovate.

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Available abstract

Credit derivative instruments allow default risk to be segregated from debt of all kinds. They have granted investors the ability to hedge their portfolios and provided numerous institutions with a new source of income. However, the market for credit default swaps is neither transparent nor regulated, perhaps undermining the stability of the financial system it has helped innovate.

Key concepts: Credit derivative, Credit default swap, Credit default swap index, iTraxx, Derivative (finance), Business, Financial system, Hedge

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