The credit default swap (CDS) is a type of credit derivative product. Credit derivatives provide transferring credit risk, which is the possibility that one of the contract parties will not able to fulfill his obligations, from one contractor to another one. Accordingly, credit derivatives are the tools that help banks, financial institutions and investors manage this risk. For example, if a debtor cannot pay the debts, losses will occur on the investments and these losses can be compensated by credit derivatives. Banks and investors prefer credit derivatives over insurance contracts because of their low transaction costs, quick payments and more liquidity. Within this context, CDS could be considered as an insurance transaction that is made to guarantee the receivable of the creditor. The cost of this insurance is the spread determined by the CDS rates. In other words, the price of a credit default swap is referred to as its spread. The spread is expressed by the basis points. For instance, a company CDS has a spread of 300 basis point indicates 3% which means that to insure $100 of this company’s debt, an investor has to pay $3 per year. The higher the risk of debt, the higher the CDS point is. The increase in CDS rates indicates that the risk of the debt or the economy has increased. Thus, beyond the insurance function against the default risk, CDS provides insight into the countries’ risks. Especially foreign investors primarily analyze the CDS of the country while they are making an investment in that country.
Published in Chapter:
Valuation of Logistics Hubs: A Case Study From Turkey
Musa Gün (Recep Tayyip Erdogan University, Turkey)
Copyright: © 2020
|Pages: 28
DOI: 10.4018/978-1-7998-1086-5.ch015
Abstract
Logistics structures playing significant roles in the economic development of countries are irreversible investments. The exact valuation of them could be difficult due to various uncertainties and problems. This chapter illustrates a methodological way to be able to make an investment decision about the creation of a logistics hub in Of-Iyidere region. Under given assumptions, the study findings indicate that (1) the investment has a positive net present value under three different cost of capital rates, which are 7.5%, 10%, and 15%; (2) the internal rate of return is 18.5%; (3) the payback period is 7 years 8 months; and (4) the discounted payback periods are calculated as 10 years 1 month, 11 years 3 months, and 14 years 11 months according to the aforementioned cost of capital rates. Moreover, the chapter discusses basic project valuation challenges and presents solutions to improve the practice of logistics hub appraisal. So, the paper exhibits an essential guidance and policy support tool to highlight the potential of logistics hub infrastructures in Turkey.