What is the credit swap market? : Interview with Greg Foss (All Interviews)
The credit default swap market is default insurance on any reference asset. It is like an insurance policy that you purchase to protect yourself if the reference asset defaults. Purchasing the insurance costs you a certain premium each year, much like an insurance premium for house insurance, fire insurance, etc. There's default insurance where you pay a certain premium that is set by the market and by the riskiness of the borrower. For example, Canada is a sovereign borrower and the insurance market for Canada is charging 37 basis points per year over a 5-year term to ensure Canada against default. This means the purchaser has to pay $37000 a year to ensure about $10 million worth of debt. The seller of the insurance collects the premium; however, they are on the hook for any payout in the event of default.