Credit Derivatives – a powerful investment tool
Web posted at: 9/22/2008 0:33:37
Source ::: The Peninsula
By Daniel Ashri, Associate Director, Capital Markets, Arqaam Capital
Since the second half of 2007, the global business community has been shaken by a series of crises that resulted in many companies suffering negative returns until the first quarter of 2008. Some international firms, however, have managed to cushion the blow and even post minimal growth through hedging as well as careful assessment of credit risks.
Apart from the sub-prime crisis, the credit crunch has undoubtedly challenged the stability of today’s financial market. It also brought to light the importance of utilizing financial tools such as credit derivatives in avoiding potential downturns.
A credit derivative acts like a bilateral insurance contract between a protection seller and a protection buyer, which could be an investment bank, insurance company, hedge fund, or any other corporation. It derives its value from the credit quality of a third party. As a financial instrument, it has been considered a means for investors to establish a buffer that will guard against the credit deterioration the third party might encounter.