Title

Credit default swaps : risk hedge or financial weapon of mass destruction?

Document Type

Journal article

Source Publication

Economic Affairs

Publication Date

10-1-2013

Volume

33

Issue

3

First Page

303

Last Page

311

Publisher

Wiley-Blackwell Publishing Ltd.

Keywords

credit default swaps, debt insurance, derivatives, JPMorgan Chase

Abstract

Credit default swaps (CDSs) are contracts between buyers and sellers of protection against default. They are a form of debt insurance, or more precisely derivatives contracts that investors buy to either insure against or profit from a default. In this way CDS contracts act as a form of debt insurance in that they provide a means of protection against credit risk. In the aftermath of the global financial crisis, the CDS earned the reputation of a ‘financial weapon of mass destruction’. Why? Is this charge justified? This paper shows that the reality is more complex: CDSs carry benefit as well as costs, and the risks associated with them can be mitigated through prudent supervision.

DOI

10.1111/ecaf.12029

Language

English

Print ISSN

02650665

E-ISSN

14680270

Publisher Statement

Copyright © 2013 Institute of Economic Affairs

Access to external full text or publisher's version may require subscription.

Full-text Version

Publisher’s Version

Recommended Citation

Sharma, S. (2013). Credit default swaps: Risk hedge or financial weapon of mass destruction? Economic Affairs, 33(3), 303-311. doi: 10.1111/ecaf.12029

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