What are the credit derivatives? I believe everyone is familiar with derivatives, so for us, there are many introductions and classifications of derivatives. So what are the following credit derivatives?
What is credit derivative 1 what is credit derivative?
Credit derivatives are financial derivatives based on loan or bond credit, and their essence is a bilateral financial contract arrangement.
definition
Under this kind of contract, the payment of the agreed amount depends on the credit status of the loan or bond payment, and there are usually two trading methods, namely option or swap. The credit status referred to is generally related to default, bankruptcy and credit rating decline. And it must be observable. The emergence of credit derivatives triggered a revolution in banking. Since the first appearance of 1992, the market of credit derivatives has developed very rapidly and will not end.
classify
There are many kinds of credit derivatives with flexible forms. According to the order and complexity, they mainly include the following products:
1, single item
Singlename refers to a credit derivative product whose reference entity is a single economic entity. Generally speaking, it includes CreditDefaultSwap (CDS), TotalReturnSwap (TRS), Credit-linkedNote (CLN) and CreditSpreadOption (CSO).
2. Combination products
Multiple names refer to credit derivatives whose reference entities are a combination of a series of economic entities, including index CDS, mortgage bonds (CDOs), swap options and graded index transactions. The transaction structure of portfolio products is complicated, but the mechanism of * * * is a portfolio pool composed of multiple basic credit default swaps or multiple single credit derivatives (so it is called multiple names). Because portfolio products are very sensitive to default correlation in credit portfolio pool, such products are also called "correlation" products.
3. Other products
Other products mainly refer to credit derivatives closely combined with asset securitization, such as proportional portfolio insurance (CPPI), proportional debt bonds (CPDO), asset securitization credit default swaps (ABCDS) and foreign exchange-guaranteed securities (CFXO). These products have complex structures and opaque pricing. Even in the most active period of credit derivatives market before the financial crisis, they were ignored, but they disappeared further after the crisis.
function
1, spreading credit risk
The appearance of credit derivative products makes credit risk management have its own technology, through which credit risk can be separated from other risks and transferred out, thus solving the problem of credit paradox in bank risk management practice. With the help of credit derivatives, banks can not only avoid excessive concentration of credit risks, but also continue to maintain business relations with customers, which is undoubtedly revolutionary to the traditional banking philosophy.
Through the pricing and trading of credit risk, more investors will be promoted to participate in the credit risk market, so that the credit risk takers in the financial market will be expanded from banks to insurance, funds, enterprises and other institutions, and the overall anti-risk ability of the financial market will be improved.
2. Improve the return on capital.
3. Improve the liquidity of the basic market.
Credit derivatives separate credit risk from financial assets, and through financial engineering, especially credit engineering technology, such as credit stratification, credit enhancement, bankruptcy isolation, etc., the risk-return characteristics of financial assets are changed again, making them into tradable financial products, thus greatly enhancing the liquidity of financial markets. In addition, credit derivatives are the re-integration of financial markets, enabling financial institutions to enter more market areas, which is equivalent to linking all markets and helping to increase market liquidity.
4. Improve the efficiency of financial markets.
What are the credit derivatives? 2 What are foreign exchange derivatives?
Foreign exchange derivative is a kind of financial contract, and its value depends on one or more basic assets or indexes. The basic types of contracts include forward, futures, swaps and options. Foreign exchange derivatives also include structured financial instruments with one or more characteristics of forward, futures, swaps and options.
basic feature
The basic characteristics of foreign exchange derivatives trading are: margin trading, that is, as long as a certain percentage of margin is paid, the full amount can be traded without actual principal transfer. Contracts are generally terminated by price difference settlement, and only contracts performed by physical delivery on the due date require the buyer to pay the full payment.
Therefore, the trading of financial derivatives has leverage effect. The lower the margin, the greater the leverage effect and the greater the risk.
Basic species
Foreign exchange derivatives are a kind of financial derivatives. Mainly includes:
(1) foreign exchange forward contract
Basic derivatives, a new product that has developed rapidly in recent years, are based on forward interest rate agreements.
(2) Foreign exchange futures
Forex futures trading principle is the same as commodity futures trading principle. By using the convergence of futures prices and spot prices, when futures contracts are close to delivery, futures prices and spot prices will tend to be consistent. In the spot and futures markets, the varieties, quantities and delivery periods are the same, but the directions are opposite. The profits of one market make up for the losses of the other market and avoid the risk of price fluctuation.
The main characteristics of forex futures trading: the transaction is a standardized contract transaction; The transaction is a margin transaction; Forward foreign exchange market is a tangible market; The transaction is based on membership system and daily settlement system; Participants are hedgers and speculators. The hedging trading method in forex futures trading is basically the same as that in general commodity period, and the basic methods can be long hedging and short hedging.
(3) Currency options
(4) Currency swap
Currency swap means that both parties agree to exchange a certain amount of two currencies at a certain exchange rate. When the agreement expires, both parties exchange money at the same exchange rate. During this period, both parties pay interest to each other according to the amount exchanged. With the continuation of gold innovation activities, on the basis of traditional currency swap, many new swap methods have emerged, including forward swap, index swap, cartel swap, interruptible swap and exploitable swap.
The main activities of the foreign exchange derivatives market involve currency swap, currency futures and mixed transactions of the above transactions. From the financial point of view, currency futures trading, like interest rate swap, is closely related to the global capital market. The foreign exchange derivatives market is unique in that:
The universality and liquidity of foreign exchange derivatives largely depend on exchange rate fluctuations, which have an impact on the financing costs of enterprises abroad and the income of international portfolio investment. Enterprise groups or companies engaged in transnational operations must skillfully use the foreign exchange derivatives market in order to implement effective risk management.
fundamental function
The function of foreign exchange derivatives has three aspects:
(1) Avoidance and management of systemic financial risks.
According to statistics, systemic risk accounts for about 50% of the investment risks in financial markets in developed countries, and preventing systemic risk is the top priority of risk management of financial institutions. Traditional risk management tools, such as insurance, asset-liability management and portfolio management, cannot prevent systemic risks, but foreign exchange derivatives, with their unique hedging and hedging functions, can effectively adjust the systemic risks caused by adverse changes in market prices of basic products such as exchange rates.
(2) Enhance the overall anti-risk ability of the financial system.
Financial derivatives have the function of avoiding and transferring risks, which can transfer risks from individuals with weak tolerance to individuals with strong tolerance, and transform the strong influence of financial risks on enterprises with weak tolerance into smaller or appropriate influence on enterprises with strong tolerance, and some even turn into profit opportunities for speculators, which enhances the overall wind resistance of the financial system and increases the stability of the financial system.
(3) Improve economic benefits.
This mainly refers to improving the operating efficiency of enterprises and the efficiency of financial markets. The former is embodied in providing enterprises with better tools to avoid financial risks, reducing financing costs and improving economic benefits; The latter is embodied in enriching and perfecting the financial market system with more than 20,000 products, reducing information asymmetry, realizing rational distribution of risks and improving pricing efficiency.
Trading mechanism
Four basic types of foreign exchange derivatives
1. foreign exchange transaction: both parties who sign the exchange contract agree to exchange assets regularly within a certain period of time.
2. Trading of foreign exchange options: The option contract may allow the contract holder to buy/sell at the price determined today in the future, which is a right, not an obligation.
3. forex futures trading: The buyer or seller of a futures contract submits a deposit at the beginning of the transaction as a buffer mechanism after the price changes. The deposit shall be adjusted periodically according to the changes in the contract price.
4. Foreign exchange forward transaction: similar to futures, but without margin system, it is a non-standardized forward agreement.
Risk reward
Foreign exchange derivatives can not only hedge risks, but also make profits by speculation, reduce risks and bear risks. This unique duality makes derivatives difficult to control. Therefore, foreign exchange derivatives have risks and rewards.
Now is the future.
At present, the spot market is not developed and perfect enough. Due to the lack of risk awareness, the demand for hedging is still very small, the laws and regulations of derivatives trading are seriously lagging behind, and the organizers and participants of derivatives trading are not mature enough. At present, the policy orientation of foreign exchange derivative transactions in China is to adhere to the principle of limited pilot.