Derivatives Markets and Analysis

CHAPTER 15Credit Default and Currency Swaps

Historically, a bond portfolio manager with speculative‐grade bonds or a financial institution with a portfolio of loans managed their portfolio's exposure to credit risk by the selection and allocation of credits (bonds or loans) in their portfolio. With the development of the credit default swap market, however, a bond manager or lender could alternatively change her credit risk by simply buying or selling swaps to change the credit risk profile on either an individual bond or loan or on a bond or loan portfolio. Similarly, a multinational company with earnings exposed to exchange rate changes could reduce their exchange‐rate exposure by swapping their dollar‐denominated debt for debt denominated ...