CREDIT DERIVATIVES are a relatively recent innovation, but they have already dramatically altered the playing field in finance. From origins in the U.S. high-yield market in the late 1980s and emerging markets in the early 1990s, the global credit derivatives market has roughly doubled each year, reaching an estimated $34.5 trillion notional outstanding as of the end of 2006.1 It is useful, however, to put the size of this market in perspective: it is still only one-tenth the size of the global interest-rate derivatives market and has a huge potential for future growth.
Credit derivatives are financial contracts whose value is derived primarily from an underlying asset or market quote that incorporates credit risk. ...

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