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Practical Methods of Financial Engineering and Risk Management by Rupak Chatterjee

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CHAPTER 6

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Introduction to Credit Derivatives

The risk of a counterparty of a financial contract failing to live up to their obligations is real and can have far-reaching consequences. The financial system is predicated on the fact that when one buys an option or bond or enters into a swap with a counterparty, the expectation is that they will honor all contingent or promised cash flows from the financial instruments in question. The failure to meet a payment of any sort is considered a credit event and is called a default. Defaults may occur when companies declare bankruptcy and can no longer meet their debt obligations in terms of interest and ...

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