What are the credit derivative products? I believe everyone is familiar with derivatives, so we have a lot of introductions about derivatives. There are also many categories of derivative products. So let’s share what the credit derivative products are.
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What are credit derivatives? 1. What are credit derivatives? Credit derivatives are financial derivatives that use the credit of loans or bonds as underlying assets. Their essence is a bilateral financial contract arrangement.
Definition Under this contract, the payment of the agreed amount by both parties depends on the credit status of the loan or bond payment. There are usually two ways to trade it, namely options or swaps.
The credit status referred to is generally associated with defaults, bankruptcies, credit rating declines, etc., and must be observable.
The emergence of credit derivatives led to a revolution in banking.
The market for credit derivatives has grown very rapidly since it first appeared in '92, and it's not going to end.
Classified credit derivative products are of various types and flexible forms. According to the order of appearance and complexity, they mainly include the following categories of products: 1. Single product Single product (Singlename) refers to a credit derivative product whose reference entity is a single economic entity. Generally speaking,
Including single-name credit default swaps (CreditDefaultSwap, CDS), total return swaps (TotalReturnSwap, TRS), credit-linked notes (Credit-linkedNote, CLN) and credit spread options (CreditSpreadOption, CSO), etc.
2. Multi-name products refer to credit derivatives whose reference entities are a combination of a series of economic entities, including index CDS, secured debt obligations (Collateralized Debt Obligation, CDO), swaptions (Swaption) and hierarchical indexes
Transactions (TranchedIndexTrades) etc.
The transaction structure of portfolio products is relatively complex, but the most common mechanism is an asset portfolio pool composed of multiple basic credit default swaps or multiple single credit derivatives (hence the name Multi-name).
Because portfolio products are very sensitive to default correlation in the credit asset portfolio pool, such products are also called "correlation" products.
3. Other products Other products mainly refer to credit fixed proportion investment portfolio insurance bonds (Constant Proportion Portfolio Insurance, CPPI), credit fixed proportion debt bonds (Constant Proportion Debt Obligations, CPDO), asset securitization credit default swaps (ABCDS) and foreign exchange guaranteed securities (CFXO), etc.
Credit derivatives closely integrated with asset securitization.
These products have complex structures and very opaque pricing. Even during the most active period of the credit derivatives market before the financial crisis, few people paid attention to them, and they further disappeared after the crisis.
Function 1. Disperse credit risk. The emergence of credit derivatives has given credit risk management its own technology. Credit derivatives can separate and transfer credit risk from other risks, thus better solving the problems faced by banks in risk management practices.
The credit paradox problem in .
With the help of credit derivatives, banks can avoid excessive concentration of credit risks and continue to maintain business relationships with customers. This is undoubtedly of revolutionary significance to the business philosophy of the traditional banking industry.
Through the pricing and trading of credit risk, more investors can be promoted to participate in the credit risk market, and the bearers of credit risk in the financial market have expanded from banks to various types of institutions such as insurance, funds, and enterprises, which has improved the
The overall risk resistance of the financial market.
2. Increase the rate of return on capital. 3. Improve basic market liquidity. Credit derivatives separate the credit risk from financial assets and re-change finance through financial engineering such as credit stratification, credit enhancement, and bankruptcy isolation, especially credit engineering technology.
The risk-return characteristics of assets are transformed into tradable financial products, thus greatly enhancing the liquidity of the financial market.