Credit default swaps (CDSs): an effective tool to manage credit risk of Indian banks

Abstract

PurposeCredit default swaps (CDSs) are among the most widely used credit derivatives since their innovation and designed to hedge the credit risk of reference entities. They were exposed after the global financial crisis of 2007–08, and were blamed for its occurrence. This paper aims to describe the fundamental mechanism of CDSs, demonstrating how a CDSs contract works. Further, this study explores the growth of the global and Indian CDS market by taking a holistic perspective.Design/methodology/approachAn objective-driven descriptive research design is adopted to achieve a rigorous and accurate analysis of the study. Therefore, research papers from high-impact journals have been carefully reviewed to achieve the aim of the study.FindingsThe study shows that CDSs are still in their infancy in India. Banks are the primary market makers and users in the Indian CDSs market; therefore, regulatory authorities must assist them to boost the market. For banks to become more confident, they should gain experience and knowledge from other active CDSs markets around the world.Originality/valueThis study attempts to provide insights into the current state of the global as well as the Indian CDS market. Further, this study suggests approaches for the Indian banking sector to play an active role in the Indian CDSs market.