Credit derivatives are financial instruments that enable credit risk on a specified entity or asset to be transferred from one party to another. Hence they are used to take on or lay off credit risk, with one party being the buyer of credit protection and the other party being the seller of credit protection.
In a relatively short time they have become a key tool in the management of credit risk for banks as well as other capital market participants. The introduction of credit derivatives has resulted in the isolation of credit as a distinct asset class.
This has improved the efficiency of the capital market because...
