Investment Valuation in India

CREDIT DERIVATIVES are over-the-counter contracts that allow credit risk to be exchanged across counterparties. A CREDIT DEFAULT SWAP (CDS) is a swap contract in which the buyer of the CDS pays premium (periodic or lump-sum) to the seller and, in exchange, receives a payoff if a credit instrument - typically a bond or loan - goes into default (fails to pay). This event of a default is called a “Credit event”. The payment made by the seller to the buyer is called a “Contingent payment” and is triggered by a credit event (CE) on the underlying credit. These contracts represent the purest form of credit derivatives (hence called Plain Vanilla), as they are not affected by fluctuations in market values as long as the credit event does not occur. Plain Vanilla CDS cater to the largest market share of the Credit Derivatives typically with 5 year maturities. Credit default swaps are often used to manage the credit risk (i.e. the risk of default) which arises from holding debt. Typically, t...