engleski

Credit Derivatives and its implication for bank portfolio management

One of the risks of making a bank loan or investigating in a debt security is credit risk, the risk of borrower default. In response to this potential problem, new financial instruments called credit derivatives have been developed in the past few years. Credit derivatives can help banks, financial companies, and investors manage the credit risk of their investments by insuring against adverse movements in the credit quality of the borrower. If a borrower defaults, the investor will suffer losses on the investment, but the losses can be offset by gains from the credit derivative. Thus, if used properly, credit derivatives can reduce as investors overall credit risk. As with other customized derivative products, however, credit derivatives expose their users to risks and regulatory uncertainty. Controlling these risks is likely to be an important factor in the future development of the credit derivatives market. This article provides information on the rational and use of credit derivatives and its implications for bank portfolio management. The first section of the article describes the basic of credit derivatives (what are credit derivatives, the type of credit derivatives). The second section shows how to value credit derivatives, and the third section examines credit derivatives implications for bank portfolio management.

credit risk; credit derivatives; bank portfolio management; credit swap; total return swap

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