Credit derivative instruments are simply financial contracts that facilitate credit risk transfer
Credit derivatives are bilateral financial contracts that transfer credit risk from one counterparty to another. This section offers a brief introduction to each of the main credit derivative products. Credit derivatives take on the form of swaps or options and can be embedded in bonds, notes or securities issued by special purpose vehicles (trusts or companies).
Ccredit derivatives desk is a market maker in the following products:
• Swaps or options with cash flows linked to the default or change in credit spread of an identified asset or basket of assets;
• Total return swaps on bonds, loans, indices or other assets with credit risk; and
• Special purpose vehicle securities (SPVs) that embed credit risk or tranche credit risk by tenor or seniority.
In Table, we show the primary risks that are transferred by a given credit derivative product.
Table : Credit Derivative Products and Risks Transferred
Primary Risks Transferred Products
Credit risk Default Swaps
Credit and spread risks Credit Spread Options
Putable, Callable and Remarketed Asset Swaps
Credit, spread and correlation risks Portfolio Default Swaps
Synthetic CDOs
Credit, spread and interest rate risks Total Return Swaps
Index Swaps
Synthetic Zero Coupon Bonds Synthetic Callable Bonds
CBOs and CLOs
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