CREDIT DEFAULT SWAPS: A STUDY FROM INDIAN PERSPECTIVE

Abstract

Credit derivatives are one of the major financial innovations of the last decade. The market for credit derivatives has become the third-largest derivatives market —after interest rate and foreign exchange derivatives— in terms of gross market value. Among credit derivatives, the credit default swap (CDS) is the most popular instrument for trading credit risk. CDSs are being perceived as a double-edged sword and are the subject of a lively discussion in the academic community as well as in the media. With India growing there has been an excessive demand for capital from all sorts of businesses to further fuel their growth. Banks seek to address this need for capital and in turn assume risk.But for India to continue to grow it’s an imperative that we have healthy financial institutions which are able to manage their risks well. Credit derivatives which emerged globally nearly a decade ago and created a rage as effective tools for credit risk management are set to help Indian banks better manage their credit risks. This research seeks to address the immense relevance of Credit Default Swaps, in the Indian context. The introduction shall provide an overview of the significant features of the recent guidelines on the introduction of CDS. This highlights the implications of the introduction of CDS and the issues that may emerge as the market gains scale.