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Credit Default Swap (CDS)

Buy or sell credit protection. Protection buyer pays premium; seller pays out on credit event.

Risk Transfer
Complexity
Intermediate
Deal Size
$10M - $500M
Typical Tenor
5 years
Scalability
Medium
#credit#derivatives#protection#hedge#capital-relief
Mini Map

Flow Types

Fee
Protection

Transaction Timeline

Phase 1: Initiation(T+0)

CDS contract executed, initial premium paid.

Use Cases

  • •Hedge credit exposure without selling bonds
  • •Sell protection to gain credit exposure synthetically
  • •Capital relief on loan portfolios
  • •Express views on credit spreads

Problem Solved

Separates credit risk from ownership. Enables credit risk transfer without asset sale.

Revenue Calculator

Model deal economics

$50M
$10M$500M
175 bps
5 bps200 bps
10 bps
18 bps

Projected Revenue

Gross Carry Income$437,500
Funding Cost($25,000)
Net Carry$412,500
Upfront Fees$90,000
Total Revenue$502,500
Annualized Return
201.0 bps
If Repeated Annually
$1,005,000

Revenue Sources

Carry Income

CDS Premium Income50-300 bps

Premium received for selling protection

Quarterly

Fee Income

Structuring FeeOne-time
10-25 bps

Fee for arranging bespoke CDS

Regulatory Checkpoints

Margin RequirementsEMIR / Dodd-Frank

Central clearing or bilateral margin required.

Risk Flags

Basis RiskMedium

CDS payout may not match actual loss on owned bonds.

Mitigation:Careful reference entity matching, physical settlement.
Counterparty RiskHigh

Protection seller may default when credit event occurs.

Mitigation:Collateralization, central clearing, credit limits.