Frontiers of Risk Management, Volume I

CHAPTER 13

Overcoming the Challenges in the Credit Derivatives Market

Pontus Eriksson

SunGard FRONT ARENA

A Bird’s-Eye View of the Credit Derivatives Market

There are many obvious advantages to an expanding credit derivatives market. The main advantage is that financial institutions can meet investor demands, for example:

• investors can hedge credit risk in isolation from other risk types;
• banks can sell off credit risk without consent from the ­borrower; and
• banks can tailor and originate synthetic credit risk.

There are, however, opposite forces, which include increased operational risk, coupled with a heavier burden of capital allocation, something that could hamper the profits of a bank. While it is probably fair to say that the benefits ...