What are credit derivatives?
Credit derivative is a type of derivative contract that allows the parties to buy and sell credit products. On the basis of a loan derivative contract, one party usually sells all or part of the credit risks associated with the credit product or a credit product volume of another party. The seller's entity generally maintains the ownership of the credit product, even after the credit risk has been transferred to an accounting unity provided with the risk. Credit derivatives can provide entities by ways to create or reduce the credit exposure associated with the default, closure of the market, bankruptcy or interest rate and exchange rates. For example,
Bank and may believe that it has closed several high -risk installments with different customers. In order to help reduce the loan exposure associated with loans, the Bank A may conclude a credit derivative agreement with Bank B. Under this Agreement, or part of the credit risk associated with this Loans volume can be transferred to Bank.Loans will remain in the bank's balance sheet A, the credit exposition will belong to the bank B. Bank B will agree to exchange for a fee paid by the bank a.
on the credit derivative market can be transferred between buyers and sellers. Credit risks associated with credit assets such as loans or mortgages are commonly traded credit products. Parties may also conclude contracts on credit risks derivatives that cover a general credit exposure. For example, the entity may want to transfer some or all credit risks associated with its own bankruptcy.
entities that wish to buy or sell credit risk can participate in credit derivatives market. Banks, hedge funds or insurance companies are parties that often agree to take over the risk associated with credit products. A traded credit derivative may include credit default products, defaultsSwaps on credit and secured debt obligations.
While there are many credit derivative agreements, some of the most common types include swaps, options and futures. Credit derivative swaps are agreements on one current of cash flows against another current in the future or before the specified date on the basis of a specified calculation. On the basis of a contract for the derivative of options, the Party shall ensure the Law, but there is no obligation to buy or sell an asset in the future date and at a specified price at the time of the contract. The Futures derivative Agreement is a contract for the transfer of the asset in the future or before the specified date, based on the specified price at the time the contract is concluded.