Managing Credit Risk in Banks: A Study of Credit Default Swaps

Credit derivative is one kind of arrangement which allows one party to transfer,for a premium, the defined credit risk, computed with reference to a notionalvalue, of a reference asset which may or may not owned by one or more otherparties. Credit Default Swaps(CDS) have existed since the early 1990s, but itsuse has become increasingly popular over time. CDS is the fastest growingsegment of the privately negotiated derivatives business as many firms depend onit to efficiently manage the financial market risks inherent in economic activities. The diversification function is especially important for active CDS marketparticipants as banks. CDS banks can achieve their loan portfolio diversificationwhich provides them with increased capacity to expand their lending.