MGEC71H3 Lecture Notes - Lecture 5: Asset-Backed Commercial Paper, Systemic Risk, Credit Derivative
9 Mar 2019
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Credit default swap (cds) is a credit derivative contract between two counterparties. The buyer makes periodic payments to the seller, and in return receives a payoff if an underlying financial instrument defaults. Cds contracts have been compared with insurance, since the buyer pays a premium and, in return, receives a sum of money if one of the specified (default) events occurs. [quoted from wikipedia entry on credit default swaps] Abcp is a package of debt -- anything from mortgages, to car loans to credit-card debt. Typically, abcp is backed by a major bank and sold to others. Banks generally agree to buy back the abcp in the event no one else will. A bank packages a collection of mortgages, credit card balances, or lines of credit into an abcp that matures in 30 days. The bank sells abcp for a fee to an intermediary that assumes all the risk associated with the underlying assets.
