|
|
|
|
||||
|
||||
Redesigning Credit Derivatives to Better Cover Sovereign Default RiskDarrell DuffieStanford University - Graduate School of Business Mohit ThukralStanford University May 3, 2012 Rock Center for Corporate Governance at Stanford University Working Paper No. 118 Abstract: We propose a redesign of sovereign Credit Default Swaps (CDS). Under our proposal, a notional CDS position of €100 can be settled by the delivery of whatever package of instruments a sovereign gives in exchange for legacy bonds with a face value of €100. To illustrate, suppose a European sovereign restructures its debt by forcibly exchanging each €100 principal of legacy bonds for €50 principal of new bonds. In this case, our proposal would allow a notional CDS position of €100 to be settled by the delivery of new bonds with a principal of €50. We show that CDS protection payouts would then reflect actual losses to bondholders. We explain why the current CDS contract design fails this test, sometimes perversely, with adverse consequences for hedging performance and price discovery. Published by Risk.net
Keywords: credit default swap (CDS), CDS contract design, credit derivatives, sovereign default risk, legacy bond exchanges, financial markets JEL Classification: G30, E51 Accepted Paper SeriesDate posted: May 4, 2012 ; Last revised: July 6, 2012Suggested Citation |
|
|||||||||||
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
FAQ
Terms of Use
Privacy Policy
Copyright
This page was processed by apollo3 in 0.687 seconds
