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Credit Derivatives: Just the facts (a tutorial)

Credit Derivatives: Just the facts
A primer tutorial on derivatives for financial services professionals

A definition of credit derivatives:
Credit derivatives can be defined as arrangements that allow one party (protection buyer or originator) to transfer credit risk of a reference asset, which it may or may not own, to one or more other parties (the protection sellers).
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The development of credit derivatives is a logical extension of two of the most significant developments of our present times: securitization, and derivatives. The concept of derivative is to create a contract that derives from an original contract or asset. For example, stock market derivatives are contracts that are settled based on movements in prices of stocks, without transferring the underlying stock. Similarly, a credit derivative is a contract that involves a contract between parties in relation to the returns from a credit asset, without transferring the asset as such.

What is a credit derivative?
A credit asset is the extension of credit in some form: normally a loan, installment credit or financial lease contract.Every credit asset is a bundle of risks and returns: every credit asset is acquired to make certain returns on the asset, and the probability of not making the expected return is the risk inherent in a credit asset.
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posted by Victor Lloyd Smith @ 1:48 PM