Options, Futures, and Other Derivatives, Ninth Edition

Chapter 25 Credit Derivatives

An important development in derivatives markets since the late 1990s has been the growth of credit derivatives. In 2000, the total notional principal for outstanding credit derivatives contracts was about $800 billion. By the credit crisis of 2007, this had become $50 trillion. After the crisis, the size of the market declined. The total notional principal was about $25 trillion in December 2012. Credit derivatives are contracts where the payoff depends on the creditworthiness of one or more companies or countries. This chapter explains how credit derivatives work and how they are valued.

Credit derivatives allow companies to trade credit risks in much the same way that they trade market risks. Banks and other ...