The relationship between CDS and benchmark interest rate

Credit risk is debt issuer?s failure to collect the debt from the debtor or not to collect the debt at maturity date or collect the incomplete amount that has been charged. Credit risk management is very important, because its exposures on large masses can reach irrecoverable sizes.During the evolution of finance world some instruments have been developed for the management of credit risks. The most important instrument is the credit default swap, which is a financial act to transfer issuers or investors credit risk to a third party.Usage of credit risks to obtain arbitrage profit and to engross instead of protection caused a worldwide disturbance. This has an undeniable role in the global financial crisis which started in USA in 2008.In this study, point of exit, causes and results of 2008 global financial crisis are scrutinized. And the debt crisis generated firstly in Greece, then in Ireland and Portugal are examined differentially.The aim of this thesis is to explain the type of credit default swap (active or passive indicator.) For this goal, first of all 5-year CDS spreads and 10-year bond yield of Greece, Ireland, Portugal have been calculated. Than the difference between these countries? (which are in debt crisis) and Germany?s 10-year bond yield is calculated and the consistency of these data are measured by making correlation analysis. And also it is learned which one is active or passive by making multiple regression analysis.On the conclusion of this study, results are examined and some advises are given.Key words: Credit risk, risk management, credit default swap, global financial crises, debt crisis, the relationship of bill of exchange interest rates.