Friday, September 30, 2005

Article on Credit Derivatives

My, how the market for Credit Derivatives has grown!

http://www.wallstreetandtech.com/showArticle.jhtml?articleID=169500449

For those of you who are new to credit derivative swaps:

CDSs are bilateral financial contracts in which one counterparty, the protection buyer, pays a periodic fee, typically expressed as a percentage of the notional amount, in return for a contingent payment by the protection seller following a credit event of a reference entity, usually a corporation. Payment is made when an issuer's credit event, such as a bankruptcy, occurs.

It sounds like an insurance policy, and in many ways, it is. Except, insurance policies cannot be traded, either individually or in baskets. Many financial institutions are using CDS's to manage risk.

There was an article that I read in the New York Times not long ago that proclaimed risk managers to be the new rock stars of Wall Street. More boring than Gordon Gecko, but definitely important post-2001.

(Credit Derivatives Technology is one of the specialities of my new employer)

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