Credit default swaps
In brief, a credit default swap (CDS) is used to transfer the credit risk of a reference entity (corporate or sovereign) from one party to another. In a standard CDS contract, one party purchases credit protection from another party, to cover the loss of the face value of an asset following a credit event. A credit event is a legally defined event that typically includes bankruptcy, failure-to-pay, and restructuring. The protection lasts until some specified maturity date. To pay for this protection, the protection buyer makes a regular stream of payments, known as the premium leg, to the protection seller. This size of these premium payments is calculated from a quoted default swap spread, which is paid on the face value of the protection. These payments are made until a credit event occurs or until maturity, whichever occurs first. The issuer of the CDS derivative has to price it before selling. We will be using the credule package for this.
These two codes are used...
