Disadvantages Of Credit Derivatives

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CREDIT DERIVATIVE What it means: A credit derivative is a financial instrument which results in a trade between two parties. One of them is the protection buyer which makes periodic payments to another party, the protection seller. In this trade the protection seller indemnifies the protection buyer against any losses he experiences as a consequence of the default of some credit-risky reference asset. Credit derivative is one of the various instruments and techniques which are designed to separate and then transfer the credit risk. They effectively distribute the credit risk across the market and as a result help the institutions to deal with the risk management objectives and maintain customer relationships. Credit derivatives permit a moneylender…show more content…
The earliest articles on the internet show that the RBI executive director back then had launched the ambitious initiative. Later the RBI took a major leap of faith in introducing the Credit Default Swaps (CDS). It started off by sending off feelers to the various major banks in India to see and gauge the level of acceptability. They asked about the bankers’ expectations as well as the apprehensions they had. Many companies expressed apprehensions with Credit Default Swaps and the role they had had to play with the subprime crisis earlier on. Yet the RBI ironed out these concerns and went ahead with the plan. The current arrangement of the Credit Default Swaps Settlement in India is as follows: 1. The Credit Default Swaps market is an Over the Counter market over here which would result in the deals being struck on bilateral terms and will make both the buyer and the seller do the negotiation and pricing as convenient as possible. 2. When it started off, the CDS market had a platform where reporting took place about all trades happening across all domains. Post maturity, this would be replaced with electronic matching of orders with a central settlement counterparty…show more content…
The money related emergency uncovered that certain dangers that credit derivatives were required to exchange far from banks and spread over the economies, had never really nullified the limitations the managing an account area and that returns that at one time seemed liberal had dominated dangers being taken. In future, more collaboration between business sector and public authorities is expected to together address certain inadequacies of the businesses for credit derivatives. We see the seeds of such participation effectively in the work attempted by different institutions, yet it is imperative that all the pertinent public authorities keep on pursuing the goal of fortifying the credit derivatives markets in co-operation with market participants and regulatory
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