Mr.
Introduction
A credit derivative is a financial product, traded Over the Counter, used to mitigate or protect against credit risk. It does so by transferring this risk from one party to another, establishing a payoff related to a change in credit, be it a default, a downgrade, or a structural change. Credit derivatives allow parties to better manage their own credit exposure and manage credit risks. Some of the more popular forms of credit derivatives are the credit default swaps, the total return swaps and the credit sensitive notes.
Credit default swaps are basically insurance policies traded by two entities whereby a payment is guaranteed against default; one party is the seller of the risk, the other one is the buyer. For example, the "SF Muni Retirement Fund" holds $100,000,000 worth of 10-year Wells Fargo Corporate Bonds. The Retirement fund enters, as investor, into a Credit default swap agreement with Goldman Sachs, the provider, agreeing to pay an undisclosed sum to GS......
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