Application of Credit Derivatives In Portfolio Management

Since their introduction in 1991, the global credit derivatives market (excluding asset swaps) has grown, exceeding previous expectations for 2003, with an estimated market of $3,548 billion or $3.5 trillion.  Growth is expected to reach $8.2 trillion by 2006 (BBA 2004).  At the time of entry to the market in the early 1990’s, it was also expected that the largest potential customers would be commercial banks that are the largest holders of risky debts.  In 2005 as in previous years, banks, securities houses and insurance companies still constitute the majority of market participants while hedge funds, which emerged as players on the buy side of the market in the last report, have this year also become major players on the sell side, and are expected to have a greater share of the market than securities houses by 2006 (BBA, 2002) While market risk allows opportunities for both profits and losses, credit risks only result in losses, and the objective of this research is to examine the effectiveness of credit derivatives as a risk management tool in improving the performance of portfolios for Bank Holding Companies (BHC’s).

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Active loan portfolio management through the use of credit derivatives

Balance Sheet ◽

10.1108/09657960110695286 ◽

2001 ◽

Vol 9 (1) ◽

pp. 47-52

Author(s):

Paul Van der Maas

Keyword(s):

Portfolio Management ◽

Credit Derivatives ◽

Loan Portfolio

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The Effects of Innovative Instruments to Market Participants and the Financial System

Pervasive Computing for Business ◽

10.4018/978-1-60566-996-0.ch014 ◽

2010 ◽

pp. 204-220

Author(s):

Demetres N. Subeniotis ◽

Ioannis A. Tampakoudis

Keyword(s):

Credit Risk ◽

Financial Institutions ◽

Portfolio Management ◽

Credit Derivatives ◽

Policy Makers ◽

Market Participants ◽

Financial Firms ◽

Innovative Products ◽

Risk Pricing ◽

Credit Risk Pricing

Financial innovation triggered new ways in which financial institutions and corporates cope with credit risk since the advent of credit derivatives. A variety of new developed financial instruments, often complex products, offers significant advantages to market participants and its key players and in particular financial institutions. As statistics indicate, advanced computerization is by large the most important factor for the wide use of credit derivatives. More efficient loans portfolio management, further business expansion and confidentiality are the main benefits for banks. In addition, various non financial firms benefit from these tailor-made products. More importantly, credit derivatives are key elements of the financial systems’ stability, through increased liquidity, risk reallocation and credit risk pricing. Nevertheless, these innovative products are accompanied by significant considerations on behalf of users and policy makers. Out of which documentation, pricing, regulation and concentration are the central concerns. Market participants and regulators should face the challenges of credit derivatives market so as to boost the trouble-free intensive growth of these instruments.

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