on 31-Dec-2014 (Wed)

A credit default swap (CDS) is an option to sell (put) bon ds at face value with the writer of the option.

The CDS premium is typically paid quarterly.

CDS tend not to trade on governments in their own currenc y – CDS on US government debt denominate d in USD, for example. But in Europe, euro-denominate d CDS are popular for the issuers whose paper is most actively trade d on a spread basis from a credit point of view: Italy , and Greece.

a Greek redenomination of debt to Drachma is a credit event, because it is low quality currency

Italian redenomination of debt to Lira would not trigger standard CDS, because it is high quality currency

a "flat" short-term yield curve - in our example, the 3-month and 6-month rates are the same at 10.0% - does not imply that the market expects interest rates to remain stable. Rather, it expects them to fall.

which comes first. Are forward-forward rates (and hence futures prices and FRA rates) the mathematical result of the yield curve? Or are the market's expectations of future rates (i.e. forward-forwards, futures and FRAs) the starting point, and from these it is possible to create the yield curve? The question is a circular one to some extent, but market traders increasingly look at constructing a yield curve from expected future rates for various periods and maturities

If the cash curve is flat, the forward curve is below the cash curve and negative

If the cash curve is negative, the forward curve is below the cash curve but not necessarily negative.

If the cash curve is positive, the forward curve could be above or below the cash curve

If I wish to borrow money for 3 months, the interest rate is likely to be different - possibly higher and possibly lower - from what the rate would be if I wished instead to borrow for 6 months. The "yield curve" is a graph showing how interest rates vary with term to maturity.