How do credit default swaps make money?

When you buy a credit default swap, you are paying the insurance premium. In this case it costs you $80,000 per year to insure this bond. So every six months you have to pay a premium of $40,000. So as a net gain you are receiving $10,000 dollars on this trade every six months.Click to see full answer. Besides, how much does a credit default swap cost? Credit default swap and sovereign debt crisis Sovereign credit default swap prices of selected European countries (2010-2011). The left axis is basis points, or 100ths of a percent; a level of 1,000 means it costs $1 million per year to protect $10 million of debt for five years. how did credit default swaps contribute to the financial crisis? Through a credit swap, a buyer can take risk control measures by shifting the risk to an insurance company in exchange for periodic payments. During the financial crisis of 2008, the value of CDS was hit hard, and it dropped to $26.3 trillion by 2010 and $25.5 trillion in 2012. Similarly, what is credit default swap with example? A credit default swap (CDS) is a financial derivative or contract that allows an investor to “swap” or offset his or her credit risk with that of another investor. For example, if a lender is worried that a borrower is going to default on a loan, the lender could use a CDS to offset or swap that risk.Who bought the credit default swaps?Lehman Brothers owed $600 billion in debt. Of that, $400 billion was “covered” by credit default swaps. That debt was only worth 8.62 cents on the dollar. The companies that sold the swaps were American International Group (AIG), Pacific Investment Management Company, and the Citadel hedge fund.