June 2001
From single names to exotics
Credit derivatives are at the heart of credit markets, yet a mystique prevails among those on the outside of the financial industry over exactly how they operate. Stephen Stonberg of Deutsche Bank examines the future of the credit derivatives market.
Credit derivatives lie at the heart of the structured
credit market and nearly all credit derivatives are based on
credit-default swaps.
These instruments are often poorly understood by outsiders. But a
plain-vanilla single-name credit-default swap is a very
straightforward contract. The complications arise when the swaps
are embedded in larger financial structures or are linked to more
than one name.
A credit-default swap works like an insurance policy. A protection
buyer, most often a bank that owns a loan or bond it wants to
hedge, pays an annual premium to a protection seller. In return,
the protection seller commits itself to making a one-off payment if
the reference credit defaults on any of its debt. The premium is
calculated as a percentage of the underlying asset.
Last month, for example, it cost around 75 basis points to buy
protection on Ford in a five-year contract - the most...
This is archived content. Your current settings does not currently allow access to the archive. To gain access visit the subscription page or call our hotline on +44 (0)207 779 8999.
If you are a trialist or subscriber, please enter your username and password at the top right-hand side of euromoney.com
Subscribers to Euromoney benefit from:
Level 1:
- Online access to the past 12 months content
- Tailored RSS news feeds direct to your desktop
- News delivered directly to your mobile device or PC
- Personalised email newsfeed of 'Top stories' and 'Breaking news'
Level 2:
- Exclusive access to euromoney.com - Read the latest issue early online, search for specific developments by region or sector, interrogate the results of Euromoney's benchmark polls, and view the archive dating back to 2000
- 12 monthly issues of Euromoney magazine
- More than 30 specialist research guides free
- The results of Euromoney’s polls and surveys
- Tailored RSS news feeds direct to your desktop
- News delivered directly to your mobile device or PC
- Personalised email newsfeed of 'Top stories' and 'Breaking news'
Click here to subscribe