Hara-Kiri Swap

A Hara-Kiri Swap is a type of credit default swap (CDS) in which the protection seller agrees to pay the protection buyer the full notional amount of the swap if a specified credit event occurs. The protection buyer, on the other hand, agrees to pay the protection seller a periodic fee.

The term "Hara-Kiri Swap" is derived from the Japanese word "hara-kiri," which means "self-disembowelment." This is a reference to the fact that the protection seller is essentially agreeing to commit financial suicide if a credit event occurs.

Hara-Kiri Swaps are often used by investors to hedge against the risk of default on a particular bond or other debt instrument. For example, an investor who owns a bond issued by a company that is in financial trouble may purchase a Hara-Kiri Swap to protect themselves against the possibility of default.

If the company defaults on its debt, the protection seller will be required to pay the protection buyer the full notional amount of the swap. This will effectively offset the loss that the investor would have suffered if the company had defaulted.

Hara-Kiri Swaps are a relatively risky investment, as the protection seller is exposed to the risk of a significant financial loss if a credit event occurs. However, they can also be a very effective way to hedge against the risk of default.

It is important to note that Hara-Kiri Swaps are not the same as suicide pacts. In a suicide pact, both parties agree to commit suicide at the same time. In a Hara-Kiri Swap, the protection seller is only obligated to pay the protection buyer if a credit event occurs. The protection seller is not obligated to commit suicide.

Hara-Kiri Swaps are a complex financial instrument and should only be used by investors who understand the risks involved.