Finance and Accounting

Credit default swaps

Project description
Identify the key characteristics of the CDS and explain its economic nature. Include a
diagram that clearly sets out the cash flows among all relevant parties.
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AFlN806 Risk Management and Derivatives Case study group project Instructions Important: These instructions replace those in the Unit guide. Submission Final Submission Due Date: 9pm on 24”‘ October 2014 The project report is to be submitted online using the relevant link in iLearn. Prior to submission you will need to submit the assignment to Turnitin and record your receipt number on the cover page of your assignment. Warning: It may take up to 24 hours to generate a report. No extensions will be granted. Students who have not submitted the task prior to the deadline will be awarded a mark of 0 for the task, except for cases in which an application for special consideration is made and approved. Groups are to be formed in iLearn in the ‘Case study group project’ section. Group size should be between three and five people. Groups should be formed by the end of week 3 of semester (i.e., 22 August) – this will ensure each team has two months to complete the project. In addition to the report, you are required to submit a journal detailing your experiences relating to the team work aspect of completing the report. It should be no longer than one page and is due at the same time as the project report. Note, each member of the team must submit their own personal journal – do not submit one for the whole team. The information recorded in the journals will be used to help resolve any conflicts that might arise around lack of contribution by any student to their group project. That is, you are not guaranteed to obtain the same mark as the other members of your group.

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AFIN806 Risk Management and Derivatives
Case study group project
Instructions
Important: These instructions replace those in the Unit guide.

Submission
Final Submission Due Date: 9pm on 24th October 2014 The project report is to be submitted online using the relevant link in iLearn. Prior to submission you will need to submit the assignment to Turnitin and record your receipt number on the cover page of your assignment. Warning: It may take up to 24 hours to generate a report. No extensions will be granted. Students who have not submitted the task prior to the deadline will be awarded a mark of 0 for the task, except for cases in which an application for special consideration is made and approved. Groups are to be formed in iLearn in the ‘Case study group project’ section. Group size should be between three and five people. Groups should be formed by the end of week 3 of semester (i.e., 22 August) – this will ensure each team has two months to complete the project. In addition to the report, you are required to submit a journal detailing your experiences relating to the team work aspect of completing the report. It should be no longer than one page and is due at the same time as the project report. Note, each member of the team must submit their own personal journal – do not submit one for the whole team. The information recorded in the journals will be used to help resolve any conflicts that might arise around lack of contribution by any student to their group project. That is, you are not guaranteed to obtain the same mark as the other members of your group.

Questions
Credit default swaps (CDS) played a key role in the financial crisis of 2008. The purpose of this assignment is for you to gain a thorough understanding of (a) the structure of the CDS product, (b) its uses for both hedging and speculative purposes, (c) the risks entailed in using CDS, (iv) the role it played in the financial crisis, and (v) what insights can be learnt from this episode. Identify a particular CDS that has been issued in the past three years. Using publicly available information only, prepare a written report that addresses the following questions. 1. Identify the key characteristics of the CDS and explain its economic nature. Include a diagram that clearly sets out the cash flows among all relevant parties. 2. What types of institutions typically invest in CDS, and why? Consider the costs and benefits of such investments. 3. Describe the concept of regulatory capital and discuss its relevance to the growth of the CDS market. 4. Discuss the role of credit ratings agencies in the CDS market. How did they contribute to the financial crisis? What lessons can be learnt from this? 5. The EU has now banned ‘naked’ trading in sovereign CDS contracts. That is, you cannot buy a CDS contract on a sovereign bond unless you actually have direct exposure to the bond which the CDS protects. Explain the background to this decision. Comment on the merits (or otherwise) of this policy. What effects is it likely to have on both the sovereign CDS and broader CDS markets?