Credit model meltdown

  The credit derivatives market is growing at a pace unprecedented in financial markets. From a non-existent business 10 years ago, the value of outstanding notionals stood at more than $26 trillion as of June, according to the latest survey from the International Swaps and Derivatives Association. That's more than four times the size of the over-the-counter equity derivatives market.

  The development of the market has proven to be a major boon for loan portfolio managers that can synthetically sell on their over-concentrated exposures to reduce counterparty risk. And the fusion of derivatives technology and credit derivatives has offered end-investors the opportunity to purchase customised credit portfolio exposures at pre-specified risk/reward trade-offs. To provide these bespoke portfolios, dealers have delta-hedged their exposures using single-name credit default swaps (CDSs), credit indexes and index tranches.

  In fact, the engine of growth in the credit derivatives market has been in the use of indexes. A Fitch Ratings study published in September says trades related to indexes and index-related products grew by 900% in 2005 to $3.7 trillion by the end of that year.

more

READ MORE: Risk.net

{mos_sb_discuss:2}