Mastering Derivatives Markets, 4th Edition

11

Credit Derivatives

‘... the credit derivatives market is “legalized homicide”.’

George Soros, at a conference in Southern England, December 2009

Introduction

What is credit risk?

Styles of trading

The first deals

Range of credit derivatives

Credit default swaps

INTRODUCTION

Credit derivatives have been blamed for most of the financial woes suffered in 2008/09 when a number of major bank collapses affected global markets. In truth, like everything else there is more to this story. No doubt in hindsight many agree that the risks inherent in these products were not fully understood. And coupling these instruments with the sub-prime mortgage market exacerbated the detrimental effects.

In December 2009, George Soros was quoted as saying ...