CDS is a contract. The full name is credit default swap, which means credit default swap contract. The CDS contract is a very common financial derivative instrument in the United States. It was pioneered in 1995 by JP Morgan (which merged with Chase Bank and Fulinming Group in 2000 to form today's JPMorgan Chase). In mid-2007, its market value reached US$45 trillion, and AIG Reported critical illness is said to be worth $62 trillion.

CDS is equivalent to a kind of insurance for the creditor's claims. Theoretically, the CDS seller sells the CDS and guarantees whether the corresponding claim will be performed in the future; in this way, the creditor as the buyer transfers the risk of credit default to the CDS seller.

Specifically, the claims guaranteed by CDS are generally a variety of bonds with different creditworthiness, such as local government bonds, bonds from emerging market countries, and bonds secured by housing mortgages (including subprime mortgages), and bonds and claims on a smaller scale or on both sides of the business. According to the usual classification of financial products, these bonds promise regular and quantitative returns to creditors, and are called fixed-income products.

The insurance commitments obtained by CDS buyers include: if the creditor's rights default, or various adverse "credit events" (credit events) such as creditor's rights downgrade occur, the income will not be affected (depending on the specific terms) depends). General creditors can still recover at least the face value of the bonds they hold.

In this way, the protection obtained by CDS buyers means that they can still obtain expected income and even profits under the conditions of credit events (when the default rate of debt products increases). Because at this time the CDS sellers will pay them cash equivalent to the face value of the guaranteed bonds. In the absence of credit events, if the guaranteed bonds perform on schedule, the CDS seller will receive regular insurance premium income from the buyer, and can also make profits from this. But generally speaking, once a "credit event" occurs, CDS sellers will suffer huge losses.

The benefit of CDS is that when a company or individual faces multiple debt risks (such as owning bonds from multiple companies) but does not want to sell all the debt immediately, it can obtain insurance provided by the CDS seller. . But another result is to encourage speculators to bet on the creditworthiness of debt products like gamblers and make profits by betting on a certain defaulted debt. Given that the market capitalization of the CDS market has exceeded the total bonds and loans represented by CDS, the speculative nature of the market has become apparent.

If an investor is optimistic about the "credit quality" of a company, he can sell the guarantee of the company's bonds to obtain income without having to spend a large amount of money to actually buy the company. of bonds.

If an investor is not optimistic about a company's credit quality, he can also spend a small amount of money to purchase the protection of the company's bonds and wait until a credit event occurs to obtain huge profits.

Since the CDS market does not require a real bond as a trading tool, but only requires a certain bond as a value reference, there are many other ways for investors to change their investment portfolios.

Market participants do not have to wait for the expiration of CDS to see income, but buy and sell CDS contracts at various speculative prices; they can also hold new CDS to stabilize the old ones in their hands. Risks posed by CDS.

Because CDS are all over-the-counter transactions, which require traders to have a good understanding of the relevant assets and at the same time calculate future returns based on their own secret mathematical models, most of the traders are financial institutions.

Also because the entire market is traded over the counter and there is no supervision, it is unknown whether the risk taken by the CDS seller exceeds its payment ability. And when the credit performance rate of the whole society has dropped significantly and widely, it is still unknown which CDS seller can afford to pay their huge losses. In this financial crisis, it is still unknown how the US government will supervise the CDS market and whether it will continue to operate without supervision in the future.