New Applications for Credit Derivatives

Abstract

Credit derivatives have, to date, mainly been used to disaggregate and lay-off the static credit risk on loan portfolios (including residential mortgage loans, commercial loans, car loans, credit card receivables, and margin lending receivables), and manage syndication and subparticipation risks. Now, however, with the maturation of the credit derivatives market, new applications for credit derivatives have emerged. This is exemplified by the decisive shift in the global credit derivatives market away from vanilla credit default swaps to more exotic structures. This article discusses the new applications of credit derivatives, namely the use of credit derivatives to: hedge credit risk in MA hedge currency convertibility risk; hedge dynamic credit risk; create leveraged positions; enhance investment returns; exploit credit arbitrage opportunities; and create synthetic assets.