Credit Default Swaps Risk Management

Abstract

A credit default swap is a tool to transfer and manage credit risk in an effective manner through re-distribution of risk. It is a form of insurance against default through a third party. In the event of default by the issuer of the bond, the protection seller would step in and pay the amount to the investor. RBI has recently announced introduction of Credit Default Swaps in the Indian debt market. Detailed operational guidelines are expected to be released by RBI in the last week of November 201. In this backdrop, this conceptual paper examines the framework of Credit Default Swaps, the current global scenario, risks involved, challenges foreseen and the role played by credit default swaps in enhancing investment opportunities in corporate bonds.