Credit Default Swap as an instrument for risk management

Abstract

The growing market economy poses new challenges in economics and management. Risk is one of the fundamental problems that has long troubled researchers, practitioners and ordinary investors. A concept so complex and ambiguous that it has not been possible for centuries to develop its single objective definition. Credit instruments are a relatively new branch of derivatives on the credit risk trading market. Financial markets have developed credit default swaps as a flexible investment risk hedge instrument that can be traded. The increasing use of CDS in determining investment risk associated with debt has raised concerns about the speculative nature of this financial instrument and the impact it may have on financial markets. The purpose of the article is to explain the basics of the mechanism of functioning of credit default swap as a modern financial instrument which, in addition to its advantages, may also have disadvantages.