CREDIT RISK AND CREDIT DERIVATIVES

Summary: Credit risk is one of the predominant risks in finances and business, and the credit risk exposure is present in almost all financial transactions. During the last several years, the scope and application of the credit risk transfer techniques and instruments have substantially increased. Credit derivatives are a new category of derivatives and the latest participants on the financial market. They were introduced in order to eliminate inadequacy of traditional credit risk transfer mechanisms, with the aim of protecting banks and other institutions from losses incurred due to defaults. All credit derivatives have certain common characteristics. Credit derivatives appear in different shapes and forms, and there are several ways of classifying them in different categories. The development of the credit derivatives market is a response to the growing importance of the credit risk management and every participant in this market has a different motivation for applying credit derivatives. On the one hand, credit derivatives are bringing benefits, while on the other hand they carry concealed hazards and risks.