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31 January 2019

The Economist: Conflicts in the credit-derivatives market threaten to undermine it

A ruling on the exact meaning of a complex contract surprises markets.

Traders in credit-derivative markets are keen on quibbles, too. Credit-default swaps (CDSs) are insurance-like derivatives designed to compensate lenders when a company goes bust. A simple enough aim, you might think, but there are plenty of devilish details. A company can go bust in many ways: it can close and have its assets sold off, or restructure its debt and keep operating. And CDS contracts pay out the difference between a bond’s face value and the price of the cheapest bond available, even though the underlying characteristics of a company’s various bonds can differ widely.

Full article on The Economist (subscription required)

© The Economist

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