A credit default swap (CDS) which comes into life at some future start date, provided that no default event occurs up till its start date. Otherwise, the contract to enter into the swap is nullified and no exchange of payments is made. If no default has occurred by the future start date, a credit default swap is entered into at that specified date. In other words, a forward CDS is a contract that obligates the holder to buy or sell a CDS on a particular reference entity for a preset spread (the forward CDS spread) at a future time. For example, a forward CDS might provides for the purchase of four year protection on firm (x) starting in one year for 250 basis points. If firm (x), also known as the reference entity, defaults within the forward’s life (i.e., one year), the swap dies out.
Derivatives
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