Making an impact (TT Sep07 p34-36)

The current dislocation in the global credit markets has been characterised by the well-documented underperformance of both credit default swaps (CDS) indices and, to a lesser extent, single-name CDS. The article concentrates on credit default swaps, both singlename and indices, which make up the largest proportion of the market and are most relevant for corporate users. CDS are increasingly used by the capital market as a proxy for assessing a credit’s relative value, and therefore by banks and bond investors as an input for bond and loan pricing. Single-name CDS and CDS indices also have direct applications for corporate users as a tool for credit hedging, risk mitigation and liquidity management.