How to explain credit default swaps?

Credit default swap, also known as credit default swap. It is a common credit derivative product in the bond market and one of the ways for investors to avoid credit risk, which can be simply understood as a form of insurance. In a CDS contract, the buyer pays a certain fee to the seller. When a specific credit default event happens to the bonds insured by CDS, if the bonds cannot be paid, the CDS seller will pay compensation to the buyer to make up for its losses in this event.

For example, Jane holds ABC corporate bonds100W, and the recent market news says that ABC may face the risk of default. At this time, Jane was a little scared, so she bought the CDS contract of ABC Company from financial institutions to hedge its credit risk. The insurance period is 3 years, and the annual premium is 1%. If ABC Company breaches the contract during this period, CDS will pay compensation for the losses caused thereby.

Credit Suisse Bank of Switzerland was furious again, and the price of CDS soared.

On Wednesday, March 15, CMAQ quoted, and the one-year credit default swap (CDS) of Credit Suisse Bank bonds soared to 1000, equivalent to 20 times the price of UBS's one-year CDS and 0/0 times that of Deutsche Bank/kloc. CDS soared, indicating that the possibility of the company's recent bankruptcy has greatly increased. The higher the base point of CDS, the greater the risk that the company will be unable to repay its debts. Investors in Credit Suisse are in extreme panic, and creditor investors buy this kind of contract, and the contract price is equivalent to a premium. When the risk of default rises, the premium will become expensive.

What happened to Credit Suisse Bank? Why did it thunder again?

Credit Suisse is a global investment bank and wealth management company. In recent years, it has experienced various problems, from investment losses and poor management to frequent turnover of senior managers. In recent days, the thunder of Credit Suisse Bank has caused the stock price to plummet. To sum up, there are several reasons behind it:

1. Credit Suisse itself disclosed major defects in internal control in its financial report.

2. The National Bank of Saudi Arabia, the major shareholder of Credit Suisse, said that it would not continue to inject capital into this institution.

3. With the collapse of Silicon Valley Bank, market panic and risk aversion increased, which aggravated its credit problems.

Fortunately, at this juncture, the Swiss central bank and financial regulators expressed their willingness to provide financial assistance and liquidity support to Credit Suisse. Recently, Credit Suisse Bank of Switzerland borrowed 50 billion Swiss francs (about 54 billion US dollars) from the Swiss Central Bank.