Question

Discuss the difference between Credit Default Swap and Total Return Swap in terms of hedging credit risk and market risk

Answer 1

Swaps- It is a derivative financial contract that takes place between two parties to exchange the cash flow in the future.

Credit default Swaps	Total return Swaps
It provides cover against the credit risk.	It provides cover against market risk.
Buyer of a credit default swaps, pay premium to the seller and receives the payment in return if default takes place.	Total return swaps exchanges the current yield and total return and any negative or positive change in value.
Default event is necessary to happen in credit default swaps	Default event is not necessary to happen in total return swaps