Jana Technology Services Blog

July 8, 2007

What are Credit Derivatives ?

Filed under: Understanding Finance / Investment Banking — janats @ 6:15 pm

We do a lot of work for companies in the Finance world, and particularly the Investment Banking sector.  We are often asked the “what are” questions from either new staff or from companies who want to understand that world a little better.  Given that we thought it would be fund to start a particular “What are”  section.

We’ll start gently with ‘what are Credit Derivatives ?’

Credit Derivatives exist on the assumption that  there is a market for risk.  In a nutshell risk-adverse parties sell on their risk at market price to organisations that are better placed to cope with it.  For example, if a bank is concerned that one of its customers may not be able to repay a loan, it might use a credit derivative to protect itself from loss by transferring the credit risk to a party with a higher tolerance.  The contract is legally binding and the documentation therefore has to be very robust.

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