The default payment in a credit derivative is triggered by the occurrence of a credit event. We saw earlier that a technical or actual default can be a credit event. The following is a list of the different types of … Continued
PRM Exam
Funded and Unfunded Credit Derivatives
Credit derivatives can be classified as funded and unfunded. Credit default swaps (CDS) are an example of unfunded credit derivatives. In such a swap, the credit protection seller does not make any upfront payment to the protection buyer. The seller … Continued
Credit Derivatives: Actual Default Vs. Technical Default
In a credit derivative contract, the protection seller will make the payment on the occurrence of a credit event. There are a number of events that can be defined as credit events. One such event is default, which could be … Continued
How Banks and Portfolio Managers Use Credit Derivatives?
As we know, credit derivatives are used in Financial Markets to transfer credit risk. Since the credit risk can be transferred independent of the asset, it can be traded as an asset itself. Companies that are considering funding can also … Continued
Total Return Swaps
Total Return Swaps (TRS) are slightly different from CDS in the sense that the total return swaps transfer the total economic benefit of the reference entity from the Total Return Payer to the Total Return Receiver. The TRS transfers both … Continued
What are Volatility Swaps?
Volatility swaps (also known as variance swaps) are over-the-counter derivatives that used to hedge against the volatility risk of the underlying instruments. The underlying in this case could be foreign exchange rates, interest rates, or stock market indices. The volatility … Continued
What are Basis Swaps?
A basis swap is a type of swap in which two parties exchange the interest payments based on two floating rates. Currency swaps are a type of basis swaps, except that the basis swaps involve only one currency. Similarly, we … Continued
What are Foreign Currency Swaps?
Currency swaps are foreign exchange contracts in which two parties agree to exchange the principal and interest of a loan in one currency with the principal and interest of an equivalent loan in another currency. The motive behind a currency … Continued
Quick Approximation of Price Value of a Basis Point (PVBP)
We know that the Price Value of a Basis Point is the change in the value of a bond due to a 1 basis point change in the interest rates. You can use a spreadsheet to calculate the PVBP. However, … Continued
Basis Point Value (BPV / DV01)
Basis Point Value also known as Delta or DV01 represents the change in the value of an asset due to a 0.01% change in the yield. It is commonly used to measure the interest rate risk in a bond position … Continued
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