Credit derivatives products

Credit derivative products are defined by reference to underlying reference entities, and reference obligations, which include corporate bonds, bank loans, sovereign debt, Brady bonds, and Eurobonds. Credit derivatives are now used increasingly in structured transactions. For example synthetic collateralised loan obligations (see Chapter 15) often use credit default swaps to transfer credit risk from the originator to the special purpose vehicle (SPV). Currently, the most common products are credit default products and total return swaps. 

We present a summary of the main characteristics of credit derivative swap products in Exhibit 21.13. EXHIBIT 21.18 Characteristics of Credit Derivative Products ... 

The NX CR Engine is a pricing and risk management tool that allows users to model a wide range of credit derivative products. It produces theoretical prices for single-name credit default swaps, baskets and CDOs. In addition, NumeriX s software produces survival probabilities, recovery rates and correlations. 

Das, S. 1997. Credit Derivatives Products, Applications and Pricing Singapore John Wiley Sons. 

The rapid rise in use of credit derivatives has contributed to the liquidity and depth of this market worldwide. It has also fostered the adoption of standardized terms and definitions. Terminology and definitions in credit derivative contracts have been developed and harmonized in recent years and assisted in the takeup of these products by a variety of financial and nonfinancial institutions. The need for appropriate credit derivatives definitions have been considered by the International Swaps and Derivatives Association (ISDA). ISDA s definitions and terms are used in the confirmations and termsheets for most credit derivative transactions. 

Various credit derivatives may be priced using this model for example, credit default swaps, total return swaps, and credit spread options. The pricing of these products requires the generation of the appropriate credit dependent cash flows at each node on a lattice of possible outcomes. The fair value may be determined by discounting the probability-weighted cash flows. The probability of the outcomes would be determined by reference to the risk neutral transition matrix. 

Credit spread products are a rapidly growing class of credit derivative. The spread in the following sections relate to a credit spread over a benchmark security. However, the traded credit spread could also refer to the CDS spread. 

We will now turn our attention to sophisticated risk management tools. These tools are critical for companies involved in the credit derivative market. The following products are designed to produce default probabilities, the fundamental building block for effective risk management. 

The products discussed include interest rate swaps, options, and credit derivatives. There is also a chapter on the theory behind forward and fiimres pricing, with a case smdy featuring the price history and implied repo rate for the CBOT long bond future. 

As noted, credit derivatives may be used by investors to manage the extra risk they take on by opting for the higher returns of non—default-free debt. The instruments can also be used, however, to synthesize the exposure itself, if, for instance, compelling reasons exist for not putting on the cash-market position. Since credit derivatives are OTC products, they can be tailored to meet specific requirements. 

Credit-derivative pricing is similar to the pricing of other off-balance-sheet products, such as equity, currency, and bond derivatives. The main difference is that the latter can be priced and hedged with reference to the underlying asset, and credit derivatives cannot. The pricing model for credit products incorporates statistical data concerning the likelihood of default, the probability of payout, and market level of risk tolerance. 

The other major use by banks of credit derivatives is as a product offering for clients. The CDS market has developed exactly as the market did in interest rate swaps, with banks offering two-way prices... 

Choudhry, M. 2010. Structured Credit Products Credit Derivatives and Synthetic Securitisation, 2nd ed. Singapore John Wiley Sons. 

It was Henri who first proposed that enzyme catalysis depended on the formation of a transient complex of enzyme and substrate, followed by the breakdown i.e., chemical conversion) of bound substrate into product. Nonetheless, credit for derivation of the rate expression for the initial rate phase of one-substrate enzyme-catalyzed reactions is given to Michaelis and Menten. Both treatments gave the same general result ... 

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