Credit risk for derivatives

  • Credit derivatives Examples

    Credit risk (also called counterparty risk) can be defined as the loss assumed by an economic agent in a financial transaction if its counterparty fails to fulfil its obligations.
    As an example, the loss of a counterparty in a loan that is not paid or in a derivatives contract when the other counterparty defaults..

  • A bank can use a credit derivative to transfer some or all of the credit risk of a loan to another party or to take additional risks.
    In principle, credit derivatives are tools that enable banks to manage their portfolio of credit risks more efficiently.
Counterparty credit risk is the risk arising from the possibility that the counterparty may default on amounts owned on a derivative transaction. Derivatives are financial instruments that derive their value from the performance of assets, interest or currency exchange rates, or indexes.

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