Series 24: Margin Requirements For Credit Default Swaps

Margin Requirements for Credit Default Swaps

A derivative is a security that is not itself an asset but whose value depends upon (is derived from) the value of an asset. If you own an option, for example, you do not own an asset; you own the right to buy (or sell) an asset depending on its future price movements. Likewise, if you buy a credit default swap (CDS), you do not buy an asset; you buy protection for an asset you already own in case it should default. In exchange for this credit protection, you provide the seller with a stream of monthly payments.

A credit default swap is a form of insurance designed to protect an asset owner from credit risk. The owner of the asset swaps its credit risk for credi