Introduction to credit derivatives

Introduction To Credit Derivatives Stephen P. D’Arcy and Xinyan Zhao

What are Credit Derivatives? ,[object Object],[object Object],[object Object]

What are Derivatives? ,[object Object],[object Object],[object Object]

What is Credit Risk ? ,[object Object]

Growth in Credit Derivatives Source:BBA Credit Derivatives Report 2006

Types of credit derivatives ,[object Object],[object Object],[object Object]

What is Credit default swap? ,[object Object],[object Object]

Example ,[object Object],[object Object],[object Object],[object Object]

Exhibit ,[object Object],Bank A Buyer Insurance Company C Seller Steel company Reference Asset Contingent Payment On Credit Event Premium Fee Credit Risk

What is credit spread option? ,[object Object],[object Object],[object Object],[object Object],[object Object]

Credit Spread ,[object Object],[object Object],[object Object],[object Object]

Exhibit Profit Spot price Strike price

Credit-linked notes ,[object Object],[object Object],[object Object],[object Object]

Exhibit Bank A Institutional investors Steel Company $1 Million fixed or floating coupon,if defaults or declares bankruptcy the investors receive an amount equal to the recovery rate $1million 500b p Steel Company

Credit Derivatives Market Participants Source:British Bankers Association (BBA) 2003/2004 Credit Derivatives Report

For the protection buyer (the risk seller) ,[object Object],[object Object]

Credit Derivatives Market Participants Source:British Bankers Association (BBA)

For the protection seller (the risk buyer) ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Questions ,[object Object],[object Object],[object Object],[object Object]

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Introduction to credit derivatives

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Introduction to credit derivatives