13.1 INTRODUCTION TO CREDIT DERIVATIVES
A credit derivative is a derivative product with credit risk as underlying. A credit risk is a risk about a payment default, partial or total, relative to any obligation of payments. Credit risk is also called counterparty risk (the counterparty to be understood as the debtor, or borrower), or default risk.
The major problem with credit derivatives is that, contrary to any other derivative, the underlying credit risk cannot be straight expressed as a number, nor straight measured on a spot market underlying. Hence the basic difficulty in pricing the derivative on an a priori “non-quantitative” underlying.
13.1.1 How to quantify a credit risk?
A non-quantitative measure as credit risk, could be indirectly quantified via: