The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies before using this site.

All material subject to strictly enforced copyright laws. © 2021 Euromoney, a part of the Euromoney Institutional Investor PLC.
Foreign Exchange

The realities of emerging market CDS

As restructuring rather than default becomes the norm for credit events in the emerging markets, it is time for those involved in the market to reappraise the effects of distressed situations on credit default swap prices, argue Manmohan Singh and Jochen Andritzky

RECOVERY VALUES ON sovereign emerging market debt have not been subject to extensive research, largely owing to the changing nature of sovereign debt crises. Since bond prices depend on the expected recovery value, it is possible to derive recovery values implied by market prices, especially during a crisis.

Spreads on credit default swap contracts can be used to estimate the implied default probabilities using the cheapest-to-deliver (CTD) bond as a proxy for a stochastic recovery value. A CDS works as an insurance policy against the risk of an underlying borrower defaulting. Typically, an investor who owns a regular bond buys a CDS and makes fixed regular payments to the protection seller (the insurer). In exchange, the insurer guarantees payment of the whole amount (par value of the bond) upon default or a credit event (as specified in the contract).

A CDS contract usually refers to a basket of deliverable bonds at the time of the contract, giving the protection seller a valuable option to deliver the cheapest bond upon default or a credit event. These CTD bonds – or deliverable bonds – are generally priced at a discount to other similar bonds owing to their illiquidity, currency denomination, legal jurisdiction, and other special features.

You have reached premium content. Please log in to continue reading.

Read beyond the headlines with Euromoney

For over 50 years, our readers have looked to Euromoney to stay informed about the issues that matter in the international banking and financial markets. Find out more about our different levels of access below.

SUBSCRIBE ONLINE TODAY

Unlimited access to Euromoney.com and Asiamoney.com

Expert comment, long reads and in-depth analysis interviews with senior finance professionals

Access the results of our market-leading annual surveys across core financial services

Access the results of our annual awards, including the world-renowned Awards for Excellence

Your print copy of Euromoney magazine delivered monthly

£73.75 per month

Billed Annually

FREE 7 DAY TRIAL

Unlimited access to Euromoney.com and Asiamoney.com, including our top stories, long reads, expert analysis, and the results of our annual surveys and awards

Sign up to any of our newsletters, curated by our editors

LOGIN NOW

Already a user?

We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree