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This article illustrates two fundamental uses of credit default swaps (CDS) in managing bond portfolios. The applications include CDSs in a buy-and-hold strategy to optimize a portfolio's return-to-risk profile and employing CDS indices to efficiently replicate corporate bond returns. Each application is thoroughly examined, demonstrating how CDS can serve as a versatile tool for mitigating credit risk while striving for higher returns. [ABSTRACT FROM AUTHOR]

The document is an editorial conclusion for a special issue on "New Theory and Applications of Nonlinear Analysis, Fractional Calculus, and Optimization." It highlights the widespread and significant applications of nonlinear analysis in various fields of mathematics and science. The special issue includes 10 research papers that cover topics such as optimality conditions, fixed point results, determinantal expressions, pricing of credit risk derivatives, pseudo-asymptotically periodic solutions, common fixed points, local unique solvability, finite-time stability, summation and integral representations, and the existence of solutions. The authors express their appreciation to the contributors and reviewers and hope that the papers inspire future research in these areas. [Extracted from the article]

The article presents an annual review from the American Bar Association on federal securities regulation in 2023. It reports regulatory developments including on the securities transaction settlement cycle, electronic data gathering, analysis and retrieval system (EDGAR) filing hours, share repurchase disclosure modernization, and references to credit ratings. It outlines accounting developments and caselaw developments in the U.S. Supreme Court and Courts of Appeals.

Article 2(10) of Regulation (EU) 2017/2402 of the European Parliament and of the Council of 12 December 2017 laying down a general legal framework for securitisation, states that "'synthetic securitisation' means a securitisation where the transfer of risk is achieved by the use of credit derivatives or guarantees, and the exposures being securitised remain exposures of the originator." This article explores the structuring of synthetic securitisations where risk is transferred by using guarantees that enable the originator to obtain the necessary credit protection. We analyse the most common structures that players in the European market use and the interest and benefits deriving from them for banking institutions acting as originators, as well as how they are implemented and organised in the Portuguese legal system. [ABSTRACT FROM AUTHOR]

The Student Managed Fund (SMF) at the University of Connecticut (UConn) School of Business was founded in 2000. In this article, we study the recent growth of and challenges encountered by UConn's SMF program. Specific areas studied include: 1) implementation of an ESG framework, 2) introduction of a new fund that incorporated hedging with derivatives in addition to equity and fixed income investing, 3) other logistical matters in the operations of the fund such as student recruitment, student participation and compliance, maintaining a balance between equities and fixed income, and gender diversity. We explore solutions including those suggested in the recent literature. Our findings might be helpful to other SMIFs. [ABSTRACT FROM AUTHOR]

We study the extent to which credit index (CDX) options are priced consistent with S&P 500 (SPX) equity index options. We derive analytical expressions for CDX and SPX options within a structural credit‐risk model with stochastic volatility and jumps using new results for pricing compound options via multivariate affine transform analysis. The model captures many aspects of the joint dynamics of CDX and SPX options. However, it cannot reconcile the relative levels of option prices, suggesting that credit and equity markets are not fully integrated. A strategy of selling CDX volatility yields significantly higher excess returns than selling SPX volatility. [ABSTRACT FROM AUTHOR]

Copyright of Journal of Economics & Administrative Sciences is the property of Republic of Iraq Ministry of Higher Education & Scientific Research (MOHESR) and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

We analyze the impact of the introduction of credit default swaps (CDSs) on real decision-making within the firm. Our structural model predicts that CDS introduction increases debt capacity more when uncertainty about the credit events that trigger CDS payment is lower. Using a sample of more than 56,000 firms across 51 countries, we find that CDSs increase leverage more in legal and market environments where uncertainty about CDS obligations is reduced and when property rights are weaker. Our results highlight the importance of legal uncertainty in the interpretation of the underlying trigger events of global credit derivatives. [ABSTRACT FROM AUTHOR]

Some dynamical contagion models for default risk have been proposed in the literature, where a system (composed of individual debtors) evolves as a Markov process conditionally on the observation of its stochastic environment, with interacting intensities.The Markovian assumption necessitates that the environment evolves autonomously and is not influenced by the transitions of the system. We extend this classical literature and allow a default system to have a contagious impact on its environment. With a certain probability, the transition of a debtor to the default state has an impact on the system's environment. This in turn affects the transition intensities of the other debtors inside the system.Therefore, in our framework, contagion can either be contained within the default system (i.e., direct contagion from a counterparty to another) or spill from the default system over its environment (indirect contagion). This type of model is of interest whenever one wants to capture within a model possible impacts of the defaults of a class of debtors on the more global economy and vice versa. [ABSTRACT FROM AUTHOR]

The article is devoted to the topical issues of long-term lending to public-private partnership projects in the context of a permanent shortage of budget funds and the financial instability of business entities. The purpose of the study is to highlight the problems of attracting long-term credit resources by partners in the process of implementing joint projects and to outline areas for their solution. To achieve this goal, general scientific research methods and analytical data from the State Statistics Service of Ukraine and the National Bank of Ukraine were used. The article reveals the main problems in the development of the debt financial instruments market, which make partnership projects between the state and business unattractive for investors. It is argued that the possibility of providing long-term loans depends not only on the actions of the bank, but also on the monetary policy of the NBU, which should ensure the introduction of preferential reserve requirements for banks, the provision of irrevocable deposits, the NBU's approval to refinance banks for the implementation of PPP projects, and the introduction of preferential lending by banks to PPP projects. The authors emphasize the priority importance of the state policy on the development of programs for the availability of long-term loans in the process of implementing partnership projects. Given the underdevelopment of financial instruments for public-private partnerships, the author substantiates the need to use innovative instruments – credit derivatives, the effectiveness of which is confirmed by international experience. The article offers a list of the most effective financial instruments that should be used at each stage of the project life cycle. It is concluded that the recommendations provided will ensure that the partners attract the necessary amount of financial resources in the process of long-term project implementation and will allow them to obtain a synergistic effect from such cooperation. [ABSTRACT FROM AUTHOR]

Credit default swaps (CDS)—the fiercely discussed derivatives instrument since the explosion of the recent global credit crunch—are still subject to considerable theoretical and practical debate. More than a decade after significant developments in CDS literature, we currently lack a holistic understanding of the disparate strands of evidence, synthesizing analytical advancements in the field. We, therefore, conducted a systematic review of 143 publications (peer‐reviewed and first‐tier grey literature), focusing on three key areas: CDS characteristics and development, credit risk hedging, and determinants of CDS use, and performed the first bibliometric mapping for CDS. Our review makes the following contributions. First, measuring CDS characteristics and development gives a snapshot of how CDS remained a significant indicator for hedging corporate lending risk. Second, by mapping the research landscape, we provide insights into banks' use of CDS; in particular, we show that banks use CDS to obtain capital relief, enhance liquidity and profitability, limit credit supply, and consequently mitigate their NPLs' level. Moreover, the use of CDS by lenders increases firms' leverage and value. Leaving a fertile area for debates and future research, the outcomes of this review help provide policy guidance to regulators and financial institutions that make informed decisions to use CDS as a credit risk management instrument. [ABSTRACT FROM AUTHOR]

The article delves into the challenges and risks encountered within the U.S. Treasury market, with a specific emphasis on liquidity concerns and the implications of regulatory measures, notably central clearing mandates. It scrutinizes recent events, such as the liquidity trap triggered by the COVID-19 crisis in March 2020, and analyzes the role of margin calls and collateralization mechanisms in exacerbating market volatility.

The article describes the main forms of credit derivatives, the evolution of their development and conditions of use. Particular attention is paid to the conditions of protection against credit risk. The authors demonstrate the possibility and expediency of using credit derivatives in the financial practice of Ukrainian companies in the context of transformation of the current legislation. It is established that credit notes, as a form of credit derivatives, are a more reliable financial instrument. From an economic point of view, they are considered to be securities with a certain set of risks and benefits for investors, which should be taken into account when developing a financial strategy for all capital market participants. The subject of the study is the intricacies of using credit derivatives in financial management, with a special emphasis on their role and conditions in modern Ukrainian financial practice. The research methodology includes a critical review of the existing literature combined with an analysis of the current use of credit derivatives in Ukraine. This approach offers a dual perspective that not only summarises the global context but also takes into account the nuances of local implementation. The purpose of this study is to investigate the effectiveness of credit derivatives as financial instruments for risk hedging and profitability optimisation. By examining different types of these instruments, the study aims to draw practical conclusions and provide recommendations for integrating these instruments into financial management practices in Ukraine. The research concludes that credit derivatives offer significant advantages as reliable financial instruments that contribute to risk management and economic development. The paper highlights their potential to positively impact financial market development, especially under conditions that facilitate risk hedging. The findings of the publication support the creation of a specific legislative and regulatory framework that would facilitate the wider introduction and efficient use of credit derivatives in Ukraine. This includes emphasising the need for specific amendments to existing tax codes and financial regulations to create a favourable environment for these instruments.

The article is devoted to the topical issues of long-term lending to public-private partnership projects in the context of a permanent shortage of budget funds and the financial instability of business entities. The purpose of the study is to highlight the problems of attracting long-term credit resources by partners in the process of implementing joint projects and to outline areas for their solution. To achieve this goal, general scientific research methods and analytical data from the State Statistics Service of Ukraine and the National Bank of Ukraine were used. The article reveals the main problems in the development of the debt financial instruments market, which make partnership projects between the state and business unattractive for investors. It is argued that the possibility of providing long-term loans depends not only on the actions of the bank, but also on the monetary policy of the NBU, which should ensure the introduction of preferential reserve requirements for banks, the provision of irrevocable deposits, the NBU's approval to refinance banks for the implementation of PPP projects, and the introduction of preferential lending by banks to PPP projects. The authors emphasize the priority importance of the state policy on the development of programs for the availability of long-term loans in the process of implementing partnership projects. Given the underdevelopment of financial instruments for public-private partnerships, the author substantiates the need to use innovative instruments – credit derivatives, the effectiveness of which is confirmed by international experience. The article offers a list of the most effective financial instruments that should be used at each stage of the project life cycle. It is concluded that the recommendations provided will ensure that the partners attract the necessary amount of financial resources in the process of long-term project implementation and will allow them to obtain a synergistic effect from such cooperation.

Copyright of Contemporary Accounting Research is the property of Canadian Academic Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

Credit default swaps (CDS) are the most common type of credit derivatives used for hedging and speculative purposes in credit markets. We consider a representative risk-averse investor who has initial endowment in credit instrument and invests in traditional financial instruments. Using the utility indifference pricing approach, we construct a pricing framework for single-name CDS contracts with periodic payments in a multi-period model. Moreover, we analyze CDS buyers with different trading motives, and examine the effect of risk aversion on the indifference upfront prices and credit spreads of CDS for investors with hedging or speculative motives. In particular, our results show that speculation in the CDS market provides a potential explanation for the formation of the negative CDS-bond bases during and after the global financial crisis. [ABSTRACT FROM AUTHOR]

This paper seeks to dissect risks which stem from the features of a sovereign credit default swap under the architecture of the 2014 ISDA Credit Derivatives Definitions (the 2014 Definitions). The paper begins with an overview of the market structure and functions of a sovereign credit default swap, followed by a brief discussion of the landscape behind the product. It then provides a narrative on specific risk considerations, mapped under broad themes such as the Credit Derivatives Physical Settlement Matrix (the Matrix) terms published by the International Swaps and Derivatives Association, Inc. (ISDA) (including trigger obligations, deliverable obligations, credit events and settlement risk). Examples of Credit Derivatives Determinations Committee (DC) deliberations have been drawn in to elucidate aspects of how the product terms are applied in practice. The goal of the paper is to assist practitioners, infrastructure providers, risk managers, regulators, academics, sovereign issuers and creditors to identify risks and assess the efficiency of sovereign credit default swaps (SOVCDS) as a hedging tool. Due to the vastness of the subject, the paper focuses on SOVCDS traded as a 'Standard' transaction type (TType) under the Matrix, where a DC credit event announcement crystallises settlement obligations. [ABSTRACT FROM AUTHOR]

This Article addresses two issues with Credit Default Swaps (CDS). First, though bankruptcy courts have correctly intuited that CDS may dictate creditor incentives, they have not fully appreciated how. Disclosure requirements in Chapter 11 are inconsistent with the actual mechanics of CDS, and therefore are unlikely to capture many of the transactions with which courts should be concerned. Second, though CDS function as synthetic debt instruments for performing credits, the economic payouts of CDS and cash bonds can deviate significantly and unpredictably for non-performing credits. To the extent that market participants deem this breakdown in equivalency a defect, rather than a feature, changes should be made to CDS' governing language-ISDA's Credit Derivatives Definitions. In addressing these issues, this Article aims to provide bankruptcy practitioners, market participants, and academics with the tools to analyze CDS, “engineered” transactions, and the implications for (i) regulatory disclosure requirements inside and outside of bankruptcy and (ii) the governing ISDA Credit Derivatives Definitions. First, I provide a detailed primer on the mechanics of CDS, paying particular attention to the auction process. Second, I analyze illustrative historical transactions, including Europcar, Codere, Hovnanian, iHeart, Supervalu, and Windstream. Third, I analyze regulatory and private contractual responses, including (i) the SEC’s recently proposed Rule 10B-1 and finalized Rule 9j-1, (ii) the 2019 ISDA Amendments, and (iii) Windstream provisions. Fourth, I analyze the relevance of engineered transactions to the “good faith” and “notice and hearing” requirements of the Bankruptcy Code. Fifth, I propose responsive amendments to (i) the Bankruptcy Rules’ disclosure requirement and (ii) ISDA’s Credit Derivatives Definitions. [ABSTRACT FROM AUTHOR]

This paper deals with a credit derivative pricing problem using the martingale approach. We generalize the conventional reduced-form credit risk model for a credit default swap market, assuming that the firms' default intensities depend on the default states of counterparty firms and that the stochastic interest rate follows a jump-diffusion Cox–Ingersoll–Ross process. First, we derive the joint Laplace transform of the distribution of the vector process (r t , R t) by applying piecewise deterministic Markov process theory and martingale theory. Then, using the joint Laplace transform, we obtain the explicit pricing of defaultable bonds and a credit default swap. Lastly, numerical examples are presented to illustrate the dynamic relationships between defaultable securities (defaultable bonds, credit default swap) and the maturity date. [ABSTRACT FROM AUTHOR]

The development and liberalization of financial markets have increased the risks that banks face when providing financial services. In this process, banks try their bests to manage the increase in their risks using derivatives. In the present study, we studied the effect of market risk, operational risk, and credit risk on the use of derivatives for the Turkish banking sector with the aim of determining the extent to which these risks are managed with the help of derivatives. Monthly data obtained from the Banking Regulation and Supervision Agency for the period 2016:M01-2022:M10 were used. The Augmented Dickey-Fuller and Philips-Perron unit root tests were run to assess the stationarity of the series. Also, the Autoregressive Distributed Lag (ARDL) Model was used to estimate the long and short run effects. The results showed that the market risk and credit risk of the banking sector have statistically significant impacts on the use of derivatives of the sector in both long and short runs. It was also observed that the operational risk of the sector has a statistically significant effect on the use of derivatives of this sector in the long run. Moreover, data analyses indicated that all explanatory variables had a positive directional relationship with derivatives in the long run. Furthermore, banks in Turkey were found to apply derivatives more intensively to manage their operational and market risks. [ABSTRACT FROM AUTHOR]

Copyright of Jurnal Ilmu Ekonomi Terapan is the property of Universitas Airlangga and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use. This abstract may be abridged. No warranty is given about the accuracy of the copy. Users should refer to the original published version of the material for the full abstract. (Copyright applies to all Abstracts.)

India is a major contributor to the global warming of the world, but there persists a prevalent lack of understanding of carbon trading (carbon credit derivative) as a commodity tradable on the stock exchange. The study brings into light the predominant drivers that can lead to the sustainable enhancement of efficacy and efficiency of carbon credit trading in India. The key drivers responsible for the sustainable implementation of the carbon credit derivative trading in India are identified and critically examined. The Analytic Hierarchy Process and Best–Worst Method have been used to rank the factors and sub-factors based on the priority (or weights) provided by the industry experts. The results indicate that the risk factors in the carbon credit derivative market are extremely crucial for enhancing sustainable trading of carbon credit derivatives closely followed by the reward and opportunity factors. The study is the first study which analyses the factors that can lead to the sustainable implementation of carbon credit trading in India. The study also contributes to the organizational strategy that carbon securitization would contribute significantly towards their financial as well as ecological sustainability. [ABSTRACT FROM AUTHOR]

In this paper we introduce a sublinear conditional operator with respect to a family of possibly nondominated probability measures in presence of multiple ordered default times. In this way we generalize the results of Biagini and Zhang (2019), where a reduced-form framework under model uncertainty for a single default time is developed. Moreover, we use this operator for the valuation of credit portfolio derivatives under model uncertainty. [ABSTRACT FROM AUTHOR]

The Global Financial Crisis of 2007--2008 has elicited various debates, ranging from ethics over the stability of the banking system to subtle technical issues regarding the Gaussian and other copulas. We want to look at the crisis from a particular perspective. Credit derivatives have much in common with treaty reinsurance, including risk transfer via pooling and layering, scarce data, skewed distributions, and a limited number of specialised players in the market. This leads to a special mixture of mathematical/ statistical and behavioural challenges. Reinsurers have been struggling to cope with these, not always successfully, but they have learned some lessons over the course of more than one century in business. This has led to certain rules being adopted by the reinsurance market and to a certain mindset being adopted by the individuals working in the industry. Some cultures established in the reinsurance world could possibly inspire markets like the credit derivatives market, but the subtle differences between the two worlds matter. We will see that traditional reinsurance has built-in incentives for (some) fairness, while securitisation can foster opportunism. [ABSTRACT FROM AUTHOR]

Using structural models for credit default swaps has been difficult. Existing models all adopt shortcuts as approximations. In this article, we provide an accurate and efficient solution to the price of the credit default swap. The main result is a Theorem in section 2. In an empirical study, we show how our model can properly capture credit default swap exposure to interest rate volatility and asset volatility. Furthermore, we apply the new model to study (1) the interactions among market, credit, and interest risks; (2) the consistency with the reduced-form credit risk models; and (3) implications to capital structure arbitrage. [ABSTRACT FROM AUTHOR]

We use Google internet search volumes to measure households' pessimism about overall market-wide credit health in the economy and show that this "household default sentiment" is positively correlated with the credit default swap (CDS) spread level in the market. However, while household default sentiment might drive the cost of credit to some degree, either directly or indirectly through its effect on the stock market, we find the stock market's opinion about the credit risk in the economy (default probabilities backed out from structural models) to be much more important in explaining credit spreads. The rather weak link between household sentiment and CDS spreads, meanwhile, is consistent with the almost complete absence of retail investors (households) in the institutional investor-dominated credit derivatives market. The results are essentially the same, whether we look at market-wide CDS indexes or single-name CDS contracts, and whether we exclude the financial crisis or not. [ABSTRACT FROM AUTHOR]

We study two credit risk models with occupation time and liquidation barriers: the structural model and the hybrid model with hazard rate. The defaults within the models are characterized in accordance with Chapter 7 (a liquidation process) and Chapter 11 (a reorganization process) of the U.S. Bankruptcy Code. The models assume that credit events trigger as soon as the occupation time (the cumulative time the firm's value process spends below some threshold level) exceeds the grace period (time allowance). The hazard rate model extends the structural occupation time models and presumes that other random factors may also lead to credit events. Both approaches allow the firm to fulfill its obligations during the grace period. We derive new closed-from pricing formulas for credit derivatives containing the (risk-neutral) probability of defaults and credit default swap (CDS) spreads as special cases, which are derived analytically via a spectral expansion methodology. Our method works for any solvable diffusion, such as the geometric Brownian motion (GBM) and several state-dependent volatility processes, including the constant elasticity of variance (CEV) model. It allows us to write the pricing formulas explicitly as infinite series that converges rapidly. We then calibrate our models (assuming that GBM governs the firm's value) to market CDS spreads from the Total Energy company. Our calibration results show that the computations are fast, and the fit is near-perfect. [ABSTRACT FROM AUTHOR]

This article analyzes financial market reactions to the Russia-Ukraine war with a focus on the opening weeks. Markets did not completely anticipate the war, and asset price reactions strengthened from the first week--when there were hopes for a quick resolution--to the second week, when prices generally peaked and began to partially revert to prewar values. Exposure to commodity trade and trade with Russia and Ukraine determined market perceptions of the riskiness of equity and foreign exchange assets. Credit default swap prices on sovereign debt and breakeven inflation rates indicate that markets saw the war as a measurable fiscal risk even for nonbelligerents. (JEL Q02, F51, G15, G32, H56) [ABSTRACT FROM AUTHOR]

Considered among of the main causes of the 2007 financial crisis, the credit risk transfer activities deserve nowadays particular attention. This study discusses the continuous effectiveness of the credit risk transfer activities by investigating their effects on the bank risk, liquidity and profitability before the crisis event and contributes to the recent scarce literature identifying this effect in the post-crisis period. Using models treating this impact on two samples of US commercial banks over the period from 2001 to 2017, the obtained results suggest an overall amplification of the risk incurred by banks notably before the crisis, a decrease of liquid assets hold on balance sheet and, generally an increase of the profitability. The employment of credit derivatives does not exhibit a conclusive result of its impact on the banking stability and performance. Nevertheless, the effect of residential mortgage loans securitization on bank risk appeared to be negative after the crisis, indicating that the securitization of this type of credit can reduce the bank risk in the detriment of a lower profit, in the new regulatory context required by Basel III.

We examine the predictive power of cross‐market informational flow in the systematic high‐yield credit default swap (CDS) and equity markets from 2004 to 2019. Overall, we find both markets useful in forecasting future values of the other, indicating each is more efficient in pricing certain types of information. However, the CDS market has an informational advantage over the high‐yield and broader equity market, something not previously documented in the closely related literature, although the advantage and forecasting ability of these markets have decreased with time due to lower volatility. These results have implications for high‐yield investors and stakeholders who monitor Markit's CDX North American High‐Yield Index for informational content. [ABSTRACT FROM AUTHOR]

We apply Geometric Arbitrage Theory (GAT) to obtain results in mathematical finance for credit markets, which do not need stochastic differential geometry in their formulation. The remarkable aspect of the GAT is the gauge symmetry, which can be translated to the financial context, by packaging all of the asset model information into a (stochastic) principal fiber bundle. We obtain closed-form equations involving default intensities and loss-given defaults characterizing the no-free-lunch-with-vanishing-risk condition for government and corporate bond markets while relying on the spread-term structure with default intensity and loss-given default. Moreover, we provide a sufficient condition equivalent to the Novikov condition implying the absence of arbitrage. Furthermore, the generic dynamics for an isolated credit market allowing for arbitrage possibilities (and minimizing the total quantity of potential arbitrage) are derived, and arbitrage credit bubbles for both base credit assets and credit derivatives are explicitly computed. The existence of an approximated risk-neutral measure allowing the definition of fundamental values for the assets is inferred through spectral theory. We show that instantaneous bond returns are serially uncorrelated and centered, that the expected value of credit bubbles remains constant for future times where no coupons are paid, and that the variance of the market portfolio nominals is concurrent with that of the corresponding bond deflators. [ABSTRACT FROM AUTHOR]