Credit spread derivatives refer to the credit spread relative to the risk-free benchmark or differentials of credit spreads of two risky assets. In addition, there are credit spread forwards and credit spread options. The specifics of credit spread derivatives is that they isolate the effect of spreads as opposed to contracts on prices subject to […]
A Credit-Linked Note (CLN) is like a credit derivative. It is a debt with payments linked to the performance of assets. Notes are tradable in the market. Being liquid is a major benefit. Protection buyers dislike looking for investors directly. They prefer to have something traded. CLNs meet this requirement. In order to be tradable, […]
Sovereign risk has grown with the exposure of emerging markets. Country risk is somehow hybrid in nature. It can be an economic crisis, a currency crisis or a political crisis. Economic crises tend to increase the default rate of all private obligors residing in the country. Another aspect of country risk is inconvertibility risk.
Credit derivatives allow us to trade credit risk as a commodity, in isolation from the underlying assets, such as interest rate and foreign exchange risks. In addition, there was no way to hedge credit risk until the appearance of credit derivatives. The insurance function of instruments is not the unique key factor.
Hedging is the most direct application of credit derivatives for bankers looking to insure against excessive risks or aiming to reshape the risk of their portfolios.
Credit derivatives have an obvious potential for portfolio management because they are new tools helping to reshape the risk-return profile of portfolios without cash sales of assets or to extend exposure beyond limits by transferring excess risks to others. They also create an inter-bank market for credit risk, allowing banks to rebalance their specific portfolios […]
Tailoring and customizing exposures is a major function of credit derivatives. This helps to reshape individual and portfolio credit risk profiles so that they meet eligibility criteria, for both lenders and investors.
One of the aims of all corporate governance codes can be defined as ensuring effective and efficient risk management of all the issues — strategic, operational, compliance and financial — facing banks in today’s environment.
Proper risk identification focuses on recognizing and understanding existing risks or risks that may arise from new business initiatives. Risk identification should be a continuous process, and should occur at both the transaction and portfolio level.
Accurate and timely measurement of risks is a critical component of effective risk management. A bank that does not have a risk measurement system has limited ability to control or monitor risk levels. The sophistication of the risk measurement tools a bank uses should reflect the complexity and levels of risk it has assumed.
