Credit Default Swaps (CDS)
Although the market for single name and index CDS has shrunk since the financial crisis, we still see interest in this course. Typically, participants are interested to learn how the product can be used either as a hedging tool or as a mechanism for expressing views on how the market is expected to move. The basic features can be picked up relatively quickly but more detailed analysis of the valuation and risk management principles can be more challenging (e.g. PV01 and DV01).
It is this sector of the market that some commentators argue was the source of many problems during the crisis. Mention of the phrase ‘collateralised debt obligation’ can still cause people to break out in a sweat! However, it was not really the product itself that was a problem but rather the quality of the assets that went into the ‘engine room’ of the instrument. Also, some of the problems experienced by these instruments related to the concept of credit correlation – something practitioners have toyed with for many years and itself a source of controversy.