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Credit Default Swap - A Crisis Indicator

Credit Default Swap ( CDS ) as a product came into existence in 1994 and was invented by Blythe Masters from JP Morgan. The purpose of the product was that buyers can take risk control measures by shifting a default risk to an insurance company in exchange for regular payments. Just acting like an insurance policy against investments.

The main goeth in these products was witnessed during the 2000s especially in 2006 when the notional value crossed $62 Trillion. In 2022 around $ 30 Trillion in volume was traded in the CDS market, which is the highest since 2009.

This market has seen a high level of activity since the end of February 2023 with the highest one-day trade volume of $61 Bn on 8th March 2023. This occurred just a few days before the SVB collapse sent tremors throughout the financial markets. Though the cost has cooled from the peak they are still up by 10% compared to the pre-bank collapse.

Since the crisis, the market has seen a regular daily volume of $5 Bn or higher as compared to an average if $3 Bn with some days with no volume.

Though this cannot be assumed that the activity is directly related to a crisis. But it does indicate that the investor community is in a risk aversion mode leading to an increase in the risk control measures in case of a bigger crisis.


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