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Assignment: Credit Derivatives

论文作者:佚名论文属性:短文 essay登出时间:2009-10-06编辑:steelbeezxp点击率:10984

论文字数:1175论文编号:org200910061123178400语种:英语论文 English地区:中国价格:免费论文

附件:模板org.pdf

关键词:Credit DerivativesSynthetic securitizationsCredit swap options

Question 2:

Question 2: Credit Derivatives

Overview

There has been a phenomenal growth in credit derivatives trading over the past five years. The emergence of credit derivatives comes from the progressive decomposition of financial risk. A traditional financial instrument will typically confront a series risks – liquidity risks, interest rate or price risks, currency risks, contingent risks, and default risks. Correspondingly, derivatives can be classified based on the form of risk that is being transferred – interest rate derivatives, currency derivatives, options, and credit derivatives and so on.
Credit risk is the potential economic loss which results from that the counterparty fails to fulfill its obligations. Credit derivatives are defined, according to Das (2005), as “a class of financial instrument, the value of which is derived from an underlying market value driven by the credit risk of private or government entities other than the counterparties to the credit derivative transaction itself”. The basic motivation of credit derivatives is to transfer the credit exposure of the underlying assets to a specific counterparty. Banks and institutional investors are the major participants of the credit derivatives market.

The reasons of market expansion

There are several key factors that lead to the rapid development of the market. The first two of the following factors are the requirements of the whole market. Others are the specific advantages of credit derivatives which are desirable from the point of view of different market participants.
The first one is the concerning about concentration of credit exposure in bank asset portfolios. The rapid deterioration of credit quality in the asset portfolios in the early 1990s and the poorly diversified structure of bank credit portfolios are the catalysts of the emergence and further development of the credit derivatives market. For instance, the deterioration in the credit quality of the emerging market obligators combined with weak local currency system, high interest rates, asset duration matching problem in local bank portfolios and that the foreign capitals are rapidly drawing out from the Asian markets lead to a systemic solvency problem and finally Asian financial crisis. Market participants began to realize the importance of the transfer of these credit exposures.
Secondly, there are plenty of developments in the management of credit risk. This also triggers the expansion of the credit derivatives market.
Thirdly, credit derivatives enable the market participants to isolate the credit risks from the assets and transfer the credit risks to the counterparties. This allows banks to hedge their credit exposure.
Fourthly, credit derivatives provide non bank investors the opportunity to access now classes of credit assets, such as emerging market assets. Credit derivatives provide market participants the opportunity to manage the credit risk of investments and an efficient mechanism to exchange credit risks.
Another useful function of credit derivatives is price discovery. The cost of credit risk can be observed and measured through the creation of credit derivatives. Credit risk is classified as a unique investment asset class. Credit derivatives entitle investors the ability to add value to portfolios through trading credit risk as a separate sector.
Finally, arbitrageur can trade credit risk to enhance yields and total论文英语论文网提供整理,提供论文代写英语论文代写代写论文代写英语论文代写留学生论文代写英文论文留学生论文代写相关核心关键词搜索。

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