Chapter 11 - Credit Derivatives

Abstract

This chapter discusses credit derivatives as a specific class of financial instruments whose value is derived from an underlying asset bearing a credit risk of private or sovereign debt issuers. The rationales behind credit derivatives are various, depending on the types of players on the market. The banks, which are the largest group of users of credit derivatives, intend to free up capital, optimize their balance sheet, manage loan exposure without the consent of the debtor, and compile to the regulatory offsets as well as for risk reduction and diversification. Institutional investors like insurance companies and fund managers, on the other hand, have the opportunity to access new classes of credit assets, such as bank loans, which have not been directly available to nonbank investors as a result of the absence of necessary origination and infrastructure.