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The Journal of Derivatives

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CDS Auctions and Recovery Rates:
An Appraisal

Rangarajan K. Sundaram
The Journal of Derivatives Spring 2013, 20 (3) 97-102; DOI: https://doi.org/10.3905/jod.2013.20.3.097
Rangarajan K. Sundaram
is a professor in the department of finance in the Stern School of Business at New York University in New York, NY.
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  • For correspondence: rsundara@stern.nyu.edu
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Abstract

Among the most important types of derivatives to appear in recent years are credit default swaps. The ability of CDS to separate credit risk exposure from ownership of the debt securities issued by a risky borrower is a major step in risk management. But the mechanics of the CDS market have been problematical, including the fact that there can easily be more protection purchased and sold through CDS than there are bonds subject to that risk in existence. Originally, in the case of a credit event the protection buyer would deliver bonds issued by the defaulting borrower to the protection seller, who was obligated to buy them at par value. This physical settlement process has recently been replaced by cash settlement, in which the payoff is based on bond prices established in an auction of the deliverable bonds. But as Sundaram explains, this is not a simple auction. In this article, he describes its complexities and comments on its potential problems.

TOPICS: Credit default swaps, exchanges/markets/clearinghouses

  • © 2013 Pageant Media Ltd
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The Journal of Derivatives: 20 (3)
The Journal of Derivatives
Vol. 20, Issue 3
Spring 2013
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CDS Auctions and Recovery Rates:
An Appraisal
Rangarajan K. Sundaram
The Journal of Derivatives Feb 2013, 20 (3) 97-102; DOI: 10.3905/jod.2013.20.3.097

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CDS Auctions and Recovery Rates:
An Appraisal
Rangarajan K. Sundaram
The Journal of Derivatives Feb 2013, 20 (3) 97-102; DOI: 10.3905/jod.2013.20.3.097
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