Janet Tavakoli
Credit derivatives were originally hyped as hedging tools to protect the value of a portfolio. For example, if you own a bond, you can buy protection against the possibility of default by paying a protection premium, similar to the premium you pay on an insurance policy.
The difference between insurance and the credit derivatives known as credit default swaps (CDS) is that you don't actually have to own the bond in order to "buy protection." But like an insurance policy, you have to negotiate the terms of the contract.
Leverage and Language
Since I wrote the first edition of my book, Credit Derivatives and Synthetic Structures in 1998, (John Wiley & Sons, second edition 2001), nothing has changed for the better in the credit derivatives market. It is the first trade book about credit derivatives and stresses that these products are primarily used for leverage. The overwhelming problems are pricing and the risk of misinterpretation of the meaning of the contract language.
Credit derivatives were originally hyped as hedging tools to protect the value of a portfolio. For example, if you own a bond, you can buy protection against the possibility of default by paying a protection premium, similar to the premium you pay on an insurance policy.
The difference between insurance and the credit derivatives known as credit default swaps (CDS) is that you don't actually have to own the bond in order to "buy protection." But like an insurance policy, you have to negotiate the terms of the contract.
Leverage and Language
Since I wrote the first edition of my book, Credit Derivatives and Synthetic Structures in 1998, (John Wiley & Sons, second edition 2001), nothing has changed for the better in the credit derivatives market. It is the first trade book about credit derivatives and stresses that these products are primarily used for leverage. The overwhelming problems are pricing and the risk of misinterpretation of the meaning of the contract language.
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