CREDIT DERIVATIVES

Click here to order this assignment @Essayfix.net 100% Original.Written from scratch by professional writers.

Bonds and loan investors run a high credit risk; the risk that the issuer of the bond or credit might default payment. This seeks for investors’ hedging against the risk by way of utilization of credit derivatives. Credit derivativesis an expression describing the financial instruments used to protect investors against losses that arise from defaults. These instruments were at first introduced to banks and later to other financial institutions. Over time, these derivatives have been applied by corporate portfolio managers, treasurers, and financial institutions for hedging against to trade credit, risk, for purposes of enhancing speculation and to enhance realization of returns. (Moorad Choudhry, 2004)

Theoretically, credit derivatives make a new class of assets made to trade default risk on a range of maturity without a collateral constraint. However, the potential efficiency benefits of credit derivatives are being reduced by lack of liquidity globally, the repo market use in hedging and the lack of secondary markets.

The pricing of these instruments is affected by factors such as the option to deliver the cheapest bond and liquidity. In addition, emanating from lack of arbitrage, the rate of repo and bond over libor spread can be utilizedd to price the default swap. (Romain G Ranciere, 2002)

In relatively short time, the credit derivative markets have grown, becoming a key component of capital markets and embracing a wide range of participants. They form…………………………………………………………………………………………..

Click here to order this assignment @Essayfix.net 100% Original.Written from scratch by professional writers.