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Article
Credit default swaps : risk hedge or financial weapon of mass destruction?
Economic Affairs
  • Shalendra SHARMA, University of San Francisco, USA
Document Type
Journal article
Publication Date
10-1-2013
Publisher
Wiley-Blackwell Publishing Ltd.
Keywords
  • credit default swaps,
  • debt insurance,
  • derivatives,
  • JPMorgan Chase
Disciplines
Abstract

Credit default swaps (CDSs) are contracts between buyers and sellers of protection against default. They are a form of debt insurance, or more precisely derivatives contracts that investors buy to either insure against or profit from a default. In this way CDS contracts act as a form of debt insurance in that they provide a means of protection against credit risk. In the aftermath of the global financial crisis, the CDS earned the reputation of a ‘financial weapon of mass destruction’. Why? Is this charge justified? This paper shows that the reality is more complex: CDSs carry benefit as well as costs, and the risks associated with them can be mitigated through prudent supervision.

DOI
10.1111/ecaf.12029
Language
English
E-ISSN
14680270
Publisher Statement

Copyright © 2013 Institute of Economic Affairs

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Citation Information
Sharma, S. (2013). Credit default swaps: Risk hedge or financial weapon of mass destruction? Economic Affairs, 33(3), 303-311. doi: 10.1111/ecaf.12029