A corporate bond and a cash-collateralised credit-default swap written on the same company ought to offset each other if the company looks likely to default, the bond will fall and the swap rise.
And, these days, if the price of a company's credit-default swaps rises (meaning that its chance of default is thought to be higher), its stock price will often fall.
And the cost of insuring Italian debt as measured by credit default swaps rose to record levels.
Spanish five-year credit default swaps rose to 166.4bps, from 157.7bps while their Portuguese equivalent rose to 281.8bps from 275.3bps.
Credit-default swaps rose about 1.4 points, to 6.05%, or $605,000 annually for five years to insure $10.0 million of debt.
The cost of insuring losses on Spanish debt for five years, via financial contracts called credit default swaps, rose to a record high of 4.98% per annum.
Dutch five-year credit default swaps rose 9 basis points to 128 bps after the failure to agree on the budget with Wilders, whose party is outside the coalition.
Those who buy protection could make substantial profits if the company gets into trouble, since the value of the swap will rise sharply.
By controlling these costs, China limits the future build-up of unnecessary debt.The swap gives rise to new questions, three of which are particularly important.
Another barometer is the price of insurance that investors can buy against losses on Treasury bonds, known as credit default swaps, which rises as the possibility of a default rises.
At the end of several months of wrangling with creditors, the government reassured markets that it saw take-up for its bond swap deal rising to more than 95% once special clauses were triggered to enforce the agreement.
