The Credit Default Swap of Central East European Countries Essay - 4

The Credit Default Swap of Central East European Countries - Essay Example The risk in entailment of equity investment is high in Central European countries compared to Countries of Western Europe and this is mainly due to factors such as the weak rule of the governments, difficult and complicated financial accounts of organizations, currency risks, the transparent rule in government institutions etc. Economic performance of each country is unique and therefore equity risk premium is different for each country.The currency board is the controller of interest rates and provides financial stability to the country. The CDS premium is a powerful instrument in the credit derivatives market because it is a direct tool for measuring the credit default spreads. CDS spreads is in proportion to the pure valuation of defaulting risk of the primary body. Credit risk is tested by approximating the equity price and the volatility jumps in the financial market. CDS spread commonly referred is the premium payment for a CDS. Credit Default Swap spreads is a yardstick for pricing and hedging insecurities. â€Å"Risk premiums for Central Europe have increased substantially over the past two years and may well come down again when confidence returns to global financial markets. This may represent an excellent buying opportunity, as risk premiums tend to rise or even overshoot during turbulent financial markets.† (Nemethy 2009). The main objective of this dissertation is to examine the differences in the risk premium reflected in the CDS of CEE countries, especially Bulgaria. Bulgaria has a currency board restriction. Countries which have a currency board restrictions faceless degree of inflation and experience more GDP growth. The idea of this dissertation is to convince that risk premiums in CDS have an impact on the economy and has differences in the risk premium. Credit default swaps are an indicator of global financial crisis.