Credit default swaps : risk hedge or financial weapon of mass destruction?
Wiley-Blackwell Publishing Ltd.
credit default swaps, debt insurance, derivatives, JPMorgan Chase
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.
Copyright © 2013 Institute of Economic Affairs
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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