CREDIT DERIVATIVES

Credit Derivative Risky In Financial Institutions

Abstract

This research study covers the level of risk involved in the credit Risk, this also discusses that how the one can mitigate the risk in the credit derivatives. Further this paper discusses the factors of the emerging markets affect the usage of derivatives within the non financial firms, and what are the factors that affect the usage of derivatives in non financial firms. In last why the usage of derivatives has been increased significantly in the non financial firms of the emerging markets

Table of Contents

Abstractii

Background1

Problem statement2

Statement of Purpose2

Conceptual framework2

Research questions3

The case4

Data collection methods5

Data analysis5

Bias and validity10

Validity11

Ethical consideration12

References13

Credit Derivative Risky In Financial Institutions

Background

As indicated throughout previous researches, derivatives have been consolidated in international markets, not only as instruments capable of ensuring the coverage of an identified risk, but at the same time as lucrative investment in highly technical and speculative portfolios, able to identify the growing but volatile opportunities for arbitrage (exploiting the spreads in prices in different markets with zero market risk).

Likewise the structure can respond to the specific needs of speculation coverage or agents without violating the limits set by the middle office (Office of Risk Management). Specific case of Capital Protected Structured Notes, currently traded on the country's pension funds which consist of - investment vehicles that guarantee a minimum nominal return of investment, tying additional revenue yields or the behavior of a basket of indices (FTE, IBEX, DJI, CAC etc). As can be seen, the rise of derivatives is limited only by the existence of underlying assets, which can hardly be limited. Categorized only in terms of risk or return implicit in the asset that provided them. Within these categorizations, it is worth noting for its relevance in the current volatile markets that showed after the subprime market crisis in credit derivatives. Such instruments as expected given the high degree of differentiation in markets mainly traded OTC (Over the Counter) having as main Underlying reference credits (companies or issuers) and reference assets (bonds or loans).

The relevant credit events specified in a transaction will usually be selected from amongst the following:

The bankruptcy of the reference entity;

Its failure to pay in relation to a covered obligation;

It defaulting on an obligation or that obligation being accelerated;

It agreeing to restructure a covered obligation or a repudiation or moratorium being declared over any covered obligation.

Problem statement

What is the default rate of loans to financial institutions that engage in trade in a class of securities, and credit derivatives?

Statement of Purpose

The purpose of this study is to address the question of whether financial innovation of credit derivatives and the consequent increase in derivatives trading or lower rates of financial institutions by default.

Conceptual framework

The CDO - (credit Derivatives Obligations), both widely questioned in the current crisis as similar instruments representing the securitization of commercial mortgage loans or with the particularity that packaging the assets typically have low liquidity characteristics attributed to poor rating risk by rating ...