Credit Derivative Products Have a Payout That Is Contingent Upon

question 70

Essay

Credit derivative products have a payout that is contingent upon a credit event occurring. The ISDA provides definitions of credit events. The 1999 ISDA Credit Derivatives Definitions (referred to as the "1999 Definitions") provides a list of eight credit events.
(a) Name four of these eight credit events.
(b) What do these events attempt to capture?

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Definitions:

Dividend Payment

The distribution of a portion of a company's earnings to its shareholders, usually in the form of cash or additional stock.

Declaration Date

The date on which a firm’s directors issue a statement declaring a dividend.

Ex-Dividend Date

The date when the right to the dividend leaves the stock. This date was established by stockbrokers to avoid confusion and is two business days prior to the holder-of-record date. If the stock sale is made prior to the ex-dividend date, the dividend is paid to the buyer. If the stock is bought on or after the ex-dividend date, the dividend is paid to the seller.

Dividend Irrelevance Theory

A theory proposed by Franco Modigliani and Merton Miller that suggests that a company's dividend policy has no effect on its market value or investors' required yield.