Credit Default Swaps Simulation

In this Credit Default Swaps Simulation, must navigate dynamic markets, price credit risk, and manage complex portfolios of CDS contracts, balancing the pursuit of profit against systemic risk and counterparty exposure.

Credit Default Swaps Simulation Overview

Participants immerse themselves in the fast-paced over-the-counter market for credit default swaps. Each simulation round presents new challenges: fluctuating credit spreads, corporate earnings announcements, economic data releases, rating agency actions, and real-time contagion effects from default events.

Acting as credit traders at a major financial institution, participants must make critical decisions. They analyze corporate and sovereign reference entities, buy or sell protection to express views on creditworthiness, manage a book of CDS positions, hedge existing exposures, and respond to margin calls and collateral demands. The simulation emphasizes the interconnected nature of credit markets, where a single default can trigger widespread volatility and force rapid strategic pivots.

This experiential learning tool is ideal for advanced university finance courses, MBA programs, and professional training at investment banks, hedge funds, and asset management firms, making the complex mechanics and strategic use of CDS instruments clear and impactful.

Credit Default Swaps Simulation Concepts

Participants work through realistic scenarios, which can be customized to emphasize or exclude specific topics depending on the learning goals. This modular structure allows the simulation to be tailored to any type of session. Key concepts include:

CDS Mechanics and Terminology
Pricing and Valuation
Credit Curve Analysis
Basis Trading and Arbitrage
Counterparty Credit Risk and Collateral Management
Portfolio Management and Netting
Regulatory Environment
Hedging Applications
Naked Speculation vs. Insurable Interest
Systemic Risk and Contagion

Gameflow

What Participants Do

In the simulation, participants will:

Analyze credit research reports and market data to assess the health of reference entities.
Execute trades to buy or sell protection on corporations or sovereigns based on their credit outlook.
Actively manage a portfolio of CDS positions, hedging risks and responding to profit and loss (P&L) fluctuations.
Negotiate terms, including spreads and collateral agreements, with counterparties.
Respond to simulated market shocks, such as sudden credit downgrades or default events, which trigger cash settlements.
Manage liquidity to meet potential margin calls resulting from adverse spread movements.
Present a strategy review to a risk committee, justifying trading decisions and portfolio performance.

Learning Objectives

By the end of the simulation, participants will be able to:

Articulate the fundamental purpose, mechanics, and uses of credit default swaps.
Interpret credit spreads and analyze the key drivers of CDS pricing.
Construct basic trading strategies using CDS for hedging, speculation, and arbitrage.
Evaluate and manage the core risks of a CDS portfolio, including jump-to-default risk and counterparty risk.
Understand the role of collateral (margin) in mitigating counterparty credit risk in derivative transactions.
Explain how CDS markets can act as an indicator of systemic risk and financial contagion.
Make disciplined trading decisions under conditions of uncertainty and market stress.
Communicate complex credit positions and their risk profile clearly to stakeholders.

How the Credit Default Swaps Simulation Works

This simulation can be run individually or in teams in academic or corporate contexts. Each cycle represents a stage of getting through a pressing financial situation.

1. Receive Market Brief and Portfolio Participants are given a starting portfolio, capital allocation, and a briefing on the current credit market environment and economic outlook.

** 2. Analyze Credit Opportunities** They review live feeds of credit spreads, company financials, news alerts, and research to identify trading opportunities.

3. Execute Trades and Manage Risk Each round, participants decide which CDS contracts to trade, set bid/ask prices, manage their portfolio concentration, and allocate capital for collateral.

4. Navigate Market Events The simulator introduces randomized and scheduled market events (M&A rumors, earnings misses, regulatory changes) that force participants to react.

5. Collaborate and Negotiate In team-based formats, participants assume roles such as Head Trader, Risk Manager, and Analyst to debate strategy and negotiate with other teams acting as counterparty banks.

6. Settle Rounds and Review At the end of each trading round, portfolios are reevaluated, P&L is calculated, margin calls are issued, and performance rankings are updated. Teams then refine their strategy for the next round.

Frequently Asked Questions

Who is the Credit Default Swaps Simulation designed for? This simulation is designed for advanced undergraduate and graduate finance students, MBA candidates, and professionals in roles related to trading, risk management, fixed income, and corporate banking who need to understand credit derivatives.
Do I need prior experience with derivatives to participate? While a foundational understanding of corporate finance and basic fixed income concepts is helpful, the simulation includes introductory instructional content, videos, and glossaries to bring all participants to a functional starting level.
How long does a typical simulation run take? The core simulation experience is designed to run for 3 to 4 hours, but it can be adapted into shorter modules for workshops or extended over multiple sessions for deep-dive courses.
Is this an individual or team-based activity? It is highly effective in both formats. The individual mode focuses on analytical and trading skills, while the team-based mode adds layers of strategy discussion, role-playing, and negotiation, closely mimicking real desk dynamics.
Does the simulation use real market data? Yes. The simulation engine is powered by algorithmic models that generate realistic, dynamic market data based on historical correlations and economic variables, providing an authentic trading environment.
Can the simulation be customized for our specific training needs? Absolutely. Facilitators can customize key parameters such as the number of reference entities, market volatility settings, the inclusion of central clearing rules, and the focus on specific sectors (e.g., financials, energy).
How is participant performance measured and assessed? Performance is multi-faceted. Key assessment metrics include risk-adjusted return, compliance with trading limits, accuracy in responding to credit events, effectiveness of hedging, and the quality of risk explanations in final reviews.

Assessment

Assessment of participant performance can be tailored according to the host institution’s objectives (business school, corporate training, assessment centre). Typical assessment criteria include:

Evaluation based on final P&L, risk-adjusted returns, and trading efficiency.
Assessment of adherence to pre-set position limits, responsiveness to margin calls, and the overall risk profile (concentration, net exposure) of the final portfolio.
Analysis of the rationale and consistency of trading decisions across market cycles, as evidenced in trade logs and strategy notes.
Evaluation of the final debrief presentation or memo to a risk committee, focusing on clarity in explaining positions, P&L drivers, and lessons learned.
Optional built-in tools allow for 360-degree feedback on collaboration, contribution, and analytical insight within teams.