Chapter 4

Credit DerivativesBasic Applications1

As derivative instruments and over-the-counter contracts, credit derivatives are very flexible products with a wide range of applications. It was their introduction that enabled synthetic structured products to be developed, which are now a major part of the debt capital markets. In the companion book in the Fixed Income Markets Library, Corporate Bonds and Structured Financial Products, we look in detail at synthetic securitization; in this chapter we present an overview of the basic applications of credit derivatives.

4.1 Managing Credit Risk

Credit derivatives were introduced initially as tools to hedge credit risk exposure by providing insurance against losses suffered due to ‘credit events’. At ...

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