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How about trading in credit derivatives?

Created by : Satish Pandey, Sr. Associate, IL&FS Venture Corporation  | 09 20 2008 06:37:20 +0000
Industry : Investment BankingFunctional Area : Derivatives(Markets)
Keywords : Trading Credit Derivatives Credit Derivatives
Activity:  200 views;  last activity : 07 06 2010 20:18:09 +0000
The opaqueness of the market and the fact that credit risk often ended up being concentrated in the hands of a few counter-parties, made the market rather risky and vulnerable. Introduction of credit derivatives on the back burner. So do you think Credit derivatives trading will be helpful in future. Is the Idea of trading in credit derivative right.
  
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Credit Derivatives are a good option when there is huge exposure to credit risk. Credit derivatives offer protection against default, downgrading risk and spread risk and mitigate credit risk by sharing between two or more. Available as option, forward and swap.

But they are complex financial instruments and are exposed to counterparty risk, liquidity risk, mispricing risk etc. Other than for hedging and risk reduction, they should be handled with great care.


By Padmanabhan R, Articled / Audit assistant, Finance student  08 06 2009 17:47:25 +0000
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The striking growth of credit derivatives in other markets suggests that market participants find them to be useful tools for risk management. An investor, such as an insurance company, asset manager, or hedge fund, can use credit derivatives to align its credit risk exposure with its desired credit risk profile.
By Satish Pandey, Sr. Associate, IL&FS Venture Corporation  | 09 20 2008 06:37:20 +0000
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Any innovative product is welcome.  Derivatives are also welcome.  The base layer innovates and reduces its risk.  It has achieved its objective of earning (perhaps to a limited extent). 

We need regulation at the secondary layer.  The secondary layer should be subjected to scrutiny - industry regulator, ombudsman.  The scrutiny should not only involve the deemed cost benefit analysis but also on recovery capability.  At the tertiary layer, the scrutiny should be much more stringent. 

Ombudsman or industry regulator or both, should in a time bound manner have the power to reverse the transaction. 

Ultimately it is public money as we have seen in the failure of major banks.  It is not a question of corporate independence. 

While encouraging credit derivatives the objective should be "trust - verify".  Trust should be that the secondary/tertiary layers have taken a sound business decision.  Verify is for the public good. 


By SR Sham Sunder, CEO/MD/Director Technoaid  | 08 08 2009 08:41:41 +0000
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Yes, Padmanabhan is right, in spite of having so much good options, there are lot of risks associated with the credit derivatives. So, proper care should be taken while investing and one should also have proper market knowledge and the risk associated with these credit derivative before expending on them.
By Esha Johar, Risk Analyst, Irevna  | 08 08 2009 04:54:12 +0000
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If there are any loop holes in this. Then this product will or may create a bubble in months/years  to come,  in hands of a knowledgeable and able, but manipulative market players & eventually may lead to what has happened in west....Credit crisis..

Credit  is one of the important cog wheel in the business of money. Its regulation is one of the key for healthy credit market conditions.

I feel---- if credit derivatives as a market is not adequately monitored, but if it has been  just implemented...for sake of giving a new flavor in financial markets

Then Credit Derivatives may or  will be Weapons of Mass Destruction for future business conditions........

 
By suchita Ambardekar, Director on Board, Vir Rubber Products Pvt Ltd, Vir auto enterprises Pvt Ltd  | 08 06 2009 04:08:33 +0000
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Credit derivatives pose risk management challenges of their own. Credit derivatives can transform credit risk in intricate ways that may not be easy to understand. They can create counterparty credit risk that itself must be managed. The settlement of a credit derivative contract following a default can have its own complications, creating settlement risk. For the credit derivatives market to continue its rapid growth, market participants must meet these risk management challenges.
By Venkatachalam C V, Sr. Associate, JP MorganChase  | 09 20 2008 06:37:53 +0000
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