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Definizione di Credit Derivatives

Derivatives such as swaps, options and forwards have long been used to transfer interest rate, exchange rate and other risks. CDs use similar, but specially adapted, instruments to trade and hedge CR. Techniques such as cash settlement – and payoffs linked to the market valuation of defaulted assets - facilitate the separation of defined CRs from the underlying instruments in which they are normally embedded. A credit asset is the extension of credit in some form: normally a loan, installment credit or a financial leasing contract. Every credit asset is a bundle of risks and returns: every credit asset is acquired to make certain returns on the asset, and the probability of not making the expected return is the risk inherent in a credit asset. There are several reasons due to which a credit asset may not yield the expected return to the holder. These include delinquency, default, losses, foreclosure, prepayment, sharp interest rate movements and erratic exchange rate movements etc. CDs are privately negotiated bilateral contracts that allow users to manage their exposures to CR. They separate the ownership and management of CR from other qualitative and quantitative aspects of ownership of financial assets. A credit derivative, being usually a composite product composed of plain vanilla counterparts, are over the counter (OTC) instruments that are designed to manage the CR in the same way as to manage currency and interest rate exposures, as well as to exploit profit opportunities arising on the market. With the use of CDs, given the default risk (DR), the CR can be transferred to another party in return for a fee - which can be considered as an insurance fee against the adverse credit market conditions, and the premium paid for the eligibility to exploit the profit opportunity. The determinants of this fee are the credit rating of probable swap counter-party, maturity, probability of default, and the expected post default value of the underlying. A bank that is concerned that one of its customers may not be able to repay a loan can protect itself against losses by transferring the CR to another party while keeping the loan on its books. This mechanism can be used for any debt instrument or a basket of instruments for which an objective default price can be determined. In this process, buyers and sellers of the CDs can achieve various objectives, including reduction of risk concentrations in their portfolios, and access to a portfolio without actually making the loans. CDs offer a flexible way of managing CR and provide opportunities to enhance yields by purchasing credit synthetically. CDs cannot eliminate all CR, because inherent in the transfer of a loan exposure to Company A, is the introduction of a new exposure to Company B because of the use of a derivative with the latter. Generally, AAArated Special Purpose Corporations or Vehicles (SPCs or SPVs) are created to enter into such transactions to reduce the new exposure. Examples of CDs include Credit Linked Notes (CLNs), Total Return Swaps (TRSs), Credit Default Puts, Credit Spread Options and others.

di S Murat Cakir

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