1. Introduction to Credit Derivatives Haifeng LIU April 2004

2. Credit Derivatives Credit Derivatives Conception & Illustration; Conception & Illustration; Credit Derivatives Market; Credit Derivatives Market; Benefits; Benefits; CDS Premium; CDS Premium; Problems; Problems;

3. Credit Derivatives: instruments Credit Derivatives Swap (CDS) Credit Derivatives Swap (CDS) Total Return Swap (TRS) Total Return Swap (TRS) Collateralized Debt Obligations (CDOs) Collateralized Debt Obligations (CDOs)

4. Credit Derivatives Swap (CDS) ‘state-dependent’ but ‘outcome-independent’ 5 years, $100 million Company XYZ priced at 100 bp per annum

5. ` Total Return Swap (TRS) Total Return Payer Total Return Receiver Total return on Bond LIBOR+25bp

6. Collateralized Debt Obligations (CDOs)

7. Global Credit Derivatives Market (Excluding Asset Swaps)

8. Participants Banks: Banks: 1. Risk diversify; 2. Specify; 3. Regulatory capital manage; Insurance companies: exposure gaining Insurance companies: exposure gaining Hedges funds, investment banks Hedges funds, investment banks

9. Participants : Protection Buyers

10. Participants : Protection Sellers

11. Participant: Participant: Net Protection Purchases Insurance

12. Benefits Risk dispersion; Risk dispersion; Risk discovery and risk pricing; Risk discovery and risk pricing; Liquidity: allow for directional and basis trading; Liquidity: allow for directional and basis trading; Creation of baskets or indexes ; Creation of baskets or indexes ;

13. CDS premium A better reflection of credit risks than the bond spreads Possibility of Default Possibility of Default Timing of default Timing of default

14. Problems Risk concentration:inter-linkages; Risk concentration:inter-linkages; Liquidity traps; Liquidity traps; Counterparty risk; Counterparty risk; Documentation difficulties; Documentation difficulties;

15. Internet Resources International Swap & Derivatives Association www.isda.org British Bankers' Association, www.bba.org.uk Bank of England, www.bankofengland.co.uk Fitch, www.fitch.com Personal site, http://www.credit-deriv.com by VINOD KOTHARI