Feasibility Analysis Of China’s Banking Sector To Carry Out Credit Default Swaps Transactions

Credit default swap is a new type of financial derivative, the basic principles of howCredit default swaps transfer credit risk is as follows: Credit default swap buyer pay aperiodic fee within the period of the contract to the seller, when the underlying assets facedcredit risk, the seller of credit default swap will Compensate for the buyer’s loss. Chinalaunched the Credit risk mitigation in October2010, this Chinese version of the creditdefault swap got the cold shoulder of the market after launched, its trading volume was muchlower than previously expected, then the feasibility of China’s banking sector to carry outcredit default swaps transactions become the focus of discussion of the domestic academiccircles.This paper divided into six sections to discuss the feasibility of credit default swaps inChina’s banking industry. The first part elaborates the relevant literature review from theperspective of the nature of the credit default swaps, pricing methods and feasibility; Thesecond part of this paper lay a theoretical basis for the research by introducing the principleof credit default swaps, the functions of credit default swaps and the risk may face in thecredit default swap transactions; The third part introduces the influencing factors that affectthe smooth development of credit default swaps; At the beginning of The fourth part, thispaper introduces several pricing theory of credit default swaps, then based on thecombination of the credit default swap pricing theory, take the price of credit default swapsas the dependent variable, the credit rating of the underlying assets, the yield to maturity ofthe underlying bond, the notional amount of the contract, the target company’s leverage ratioas the independent variable, this paper takes an empirical test of these four indicators how toaffect the credit default swap prices by create a multiple linear regression model. Theempirical results show that the credit rating of the underlying assets and the target company’sleverage ratio have a inversely proportional relationship with the price of credit defaultswaps, the yield to maturity of the underlying bond and the notional amount of the contracthave Proportional relationship with the price of credit default swaps; The fifth part firstdescribes the status of China’s banking industry to carry out Credit risk mitigation, and thenanalyzes the favorable and unfavorable conditions of China’s banking industry to carry outcredit default swaps now. The last part summarized the full text, and given some suggestionsabout credit default swaps smoothly carry out in China’s banking industry.