Five Tactical Uses of Credit Default Swaps

Nov 1, 2004

The credit default swap (CDS) market is one of the purest and most responsive indicators of corporate financial health.  Since the release of ISDA's "Master Agreement," CDS transactions have become simpler and CDS markets have become available to a whole new universe of investors.  As Goldman Sachs expressed in a bulletin published in May 2001."... use of default swaps will increasingly become a necessary component of any successful portfolio management strategy."  The purpose of this article is to illuminate the structure of these new instruments and to highlight their potential for credit asset manager.  Active management of cash credit portfolios produces significantly less return than investors' views of the credit asset class would have us believe.  There are a number of reasons for this, including: 'A manager who wants to take a long position', 'A manager who wants to go short', 'A manager shifts allocations.'