Credit Derivative

From Open Risk Manual

Definition

Credit Derivative is any from a range of financial instruments that provide for the direct exchange of credit risk between counterparties without requiring the transfer of the assets that give rise to such exposure. They encompass a range of instruments that allow either full (e.g. total return swaps) or partial credit protection under specific circumstances (e.g. credit default options) for the protection buyer.

The flexibility of such instruments allows banks to actively manage the credit risks per counterparty; per sector and per geographic area regardless of the instruments they are hedging (securities, loans or off-balance sheet items).

Credit derivatives are one of the main categories of instruments allowing for risk transfers between banks and other financial institutions.


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