Functioning of Credit Default Swaps

Functioning of Credit Default Swaps

Functioning of Credit Default Swaps:
  • A credit default swap (CDS) is a credit derivatives instrument that provides insurance to the buyer [Protection Buyer] against the risk of a default by a particular company [Reference Entity].
  • The fundamental role of credit default swaps is to transfer credit risk between a party wishing to reduce credit risk, often called the protection buyer, risk seller or risk hedger (the party going short the credit), and the party wishing to acquire or hold credit risk, often called the protection seller or risk buyer (the party going long the credit).
  • Each CDS has a notional amount and it requires the buyer to pay a premium called CDS spread.
  • The credit event is binary in nature, i.e. it occurs, or it doesn’t.
  • Typical credit events include (a) a filing for bankruptcy by the third party on whose bond the CDS was issued, (b) any failure by the third party to pay interest on its bonds, and (c) any restructuring of the Debt.

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An Introduction to Income Statements

An Introduction to Income Statements

Income statement is a type of financial statements used in accountancy and businesses. They are also referred to as Profit and loss statements or P&L statements. The concept of Income statements can be understood by using a simple example:
  • Suppose an individual wants to start a small-scale parcel delivery service and wants to keep a record of how profitable his business is, he will need to maintain income statements during a subjectively selected time interval which can be a month, a quarter, a year, etc.
  • Profitability is measured by two things (i) the amount that is earned by the enterprise i.e. revenues (ii) the expense involved in making those revenues.
  • The purpose of the income statement is to reflect the firm’s profit or loss during the specified period. The difference between the revenues and expenses is calculated and labeled as Net Profit or Net loss. This difference is also referred to as the Bottom Line.
  • One important point to note regarding the income statements is that it shows revenues, gains, expenses, and losses and not the cash received and cash disbursed. Suppose the firm does 100 deliveries in a month at $4 per delivery. The amount earned by the firm i.e. $400 is its revenue. It does not matter when the payments are received by the firm.
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AT1 Capital or Contingent Convertible Capital Instruments

AT1 Capital or Contingent Convertible Capital Instruments

AT1 Capital or Contingent Convertible Capital Instruments: Additional tier-1 (AT1) or contingent convertible capital instruments, known as CoCo bonds or Enhanced Capital Note (ECN) are the types of unsecured, perpetual bonds that are issued to absorb losses when the capital of the issuing financial institution falls below the regulatory standards. The purpose behind issuing the contingent convertible bonds is to maintain the ratio as per Basel III norms and existence of banks during the crisis.  As per Basel III norms, a bank must maintain enough capital to be able to withstand a financial crisis and absorb unexpected losses from loans and investments. Total regulatory capital consists of tier-1 capital, which includes common equity tier-1 (CET1) and AT1, as well as tier-2 capital. (more…)
Stock Exchange and Its role in Economy

Stock Exchange and Its role in Economy

The Indian Securities Contracts (Regulation) Act of 1956, defines Stock Exchange as, “An association, organization or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities.” In simple terms an exchange is an institution, organization, or association which hosts a market where stocks, bonds, options, futures, and commodities are traded. Buyers and sellers come together to trade during specific hours on business days. Exchanges impose rules and regulations on the firms and brokers that are involved with them. If a particular company is traded on an exchange, it is referred to as "listed”. (more…)
What are Eurobonds?

What are Eurobonds?

Eurobonds are interest-bearing securities denominated in a currency other than the home currency of the country or market in which it is issued. They are commonly issued by governments, corporations, and international organizations. These instruments often trade on an exchange and they trade much like other bonds. The Eurobond market is considered less liquid than the traditional bond market. Mostly coupon of Eurobonds is paid annually. Eurobonds are usually bearer bonds which means that no transfer agent keeps a list of bondholders and arranges the interest and principal payments. Instead, holders receive interest when they present the coupon to the borrower, and receive the principal when the bond matures. (more…)
FRM Level I Exam Structure

FRM Level I Exam Structure

FRM Level I Exam Structure

What is FRM Exam?? The Global Association of Risk Professionals (GARP) established the FRM designation to identify and recognize risk professionals who are qualified to make informed decisions based on current, globally accepted industry standards. The FRM designation indicates you have a strong understanding of the underlying risk management concepts in today’s ever-changing financial markets which has been validated by international professional standards. (more…)
FRM Level II Exam Structure

FRM Level II Exam Structure

FRM Level II Exam Structure:

What is FRM Exam?? The Global Association of Risk Professionals (GARP) established the FRM designation to identify and recognize risk professionals who are qualified to make informed decisions based on current, globally accepted industry standards. The FRM designation indicates you have a strong understanding of the underlying risk management concepts in today’s ever-changing financial markets which has been validated by international professional standards. (more…)
Direct & Indirect Currency Quote

Currency Quote – What is Direct & Indirect Quote?

How to read a Currency Quote? When a currency is quoted it is always quoted in terms of some other currency. So if you are trying to determine the exchange rate between the US Dollar and Euro then it might look something like EUR/USD 1.11. In this currency pairing, the currency on the left side is called as Base Currency and currency to the right is called the Quoted Currency. The base currency is always equal to one unit (in this case, 1Euro), and the quoted currency (in this case, the US Dollar) is what that one base unit is equivalent to in the other currency. (more…)
All About FRM Exam

Financial Risk Management (FRM) Exam Full Details

FRM Exam Details

If you’re considering the FRM course, you definitely have questions. We are here to answer every question and guide you through the successful completion of the course. You can read through the article to get Full details regarding the FRM exam and get a fair idea about the start to end process of earning this credential and what to expect from the exam. What is FRM Exam?? The Global Association of Risk Professionals (GARP) established the FRM designation to identify and recognize risk professionals who are qualified to make informed decisions based on current, globally accepted industry standards. The FRM designation indicates you have a strong understanding of the underlying risk management concepts in today’s ever-changing financial markets which has been validated by international professional standards. (more…)