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Mastering Investment Banking Securities by Natasha Kozul

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17

Credit risk on derivatives

Counterparty risk

Product risk

Credit risk of specific financial instruments

Credit ratings

Credit risk management

Credit risk management best practice guidelines

INTRODUCTION

When an investment bank enters into a transaction with a client, it is exposed to the risk that the client may default on their obligation. Such risk is called credit risk. The bank may try to reduce the risk of default by only dealing with clients of high creditworthiness, but as history has shown, even large investment banks can go into bankruptcy. Therefore, it is a real and present danger in any transaction a bank undertakes. It is described in more detail in the following sections.

COUNTERPARTY RISK

In a nutshell, this is an estimate ...

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