4

62-95

34

 

Blackwell Publishing (Visit publisher website)

2005

English

 

 

 

Basic

 

 

Credit derivatives, categories of credit derivative applications, market risk, liquidity risk, volatility risk, credit risk, operational risk, categories of operational risk, use of credit derivatives for yield enhancement, use of credit derivatives for cost reduction, use of credit derivatives for convenience, use of credit derivatives for arbitrage, use of credit derivatives for regulatory capital relief, Basel II Accord, standardized versus internal rating based approach, risk weights for positions hedged with credit derivatives

 

This chapter is simply loaded with example applications of credit derivates - 26 examples in all. Five types of practical applications of credit derivatives are discussed: hedging, yield enhancement, cost reduction and convenience, arbitrage and regulatory capital relief. The section on hedging discusses the risks that can be hedged and which credit derivative products are used to hedge each type of risk. The section on regulatory capital relief provides an overview of the Basel II Accord and the role credit derivatives play in reducing capital requirements. Anyone who is even vaguely familiar with credit derivatives but hasn`t mastered their application would benefit from reading this chapter.

 

4.1 Hedging
4.1.1 Market risk
4.1.2 Credit risk
4.1.3 How are market risk and credit risk related?
4.1.4 Operational risk
4.1.5 Which credit derivative hedges which risk?
4.2 Yield Enhancement
4.3 Cost reduction and convenience
4.3.1 Cost reduction
4.3.2 Convenience
4.4 Arbitrage
4.5 Regulatory capital relief
4.5.1 The Basel II Accord
4.5.2 Standardized versus IRB Approach
4.5.3 Banking book versus trading book
4.5.4 Risk weights for positions hedged by credit derivatives in the banking book
4.5.5 Risk weights for positions hedged by credit derivatives in the trading book
4.5.6 The BIS minimum capital requirement for combined credit, market, and operational risk
4.6 Summary of chapter 4
4.7 References and suggestions for further reading
4.8 Questions and problems
4.9 Notes

 

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*** From the publisher ***
The market for credit derivatives--financial instruments designed to transfer credit risk from one party to another--has grown exponentially in recent years, with volume expected to reach more than $4.8 trillion by 2004. With demand increasing from the private sector for finance professionals trained in the opportunities--and dangers--inherent in this fast-changing market, finance courses are already springing up to meet this need.

Credit Derivatives:

* Explains the field of credit derivatives to business students with a background in finance
* Cites real-world examples throughout, reinforced by end-of-chapter questions and internet links to pricing models
* Provides a concise overview of the field that is ideal for instructors seeking to supplement traditional derivatives course material, as well as those looking to offer a stand-alone course on credit derivatives.