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Tuesday, June 20, 2017

Will noble group's credit extension trigger a credit default swap payout?

Credit default swap is tantamount to an insurance against a default.  When there is a credit event, the buyer of CDS will get a payout from the seller.  If this credit extension to noble represents a credit event, the buyers of CDS will get payouts on the company's $5b debt.

Basically, the CDS doesn't affect the underlying shares because CDS market is largely unregulated.  If there is a default, you'll get the par value of your CDS as a buyer.  A buyer will have to pay an "insurance premium" to the seller for the CDS periodically for the risk transfer and is entitled to an "insurance payout" when there is a credit event.

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