Question

What are advantages and disadvantages of credit derivatives?

Answer 1

Meaning of Credit Derivatives:

Credit derivatives is a complex financial instrument. It is a tool to manage the risk in credit portfolio without affecting the portfolio size or customer needs.

Advantages of Credit Derivatives:

1. Help in enhancing the market liquidity and efficiency.

2. Creates financial stability.

3. Enable the investor to take the credit risk as per capacity.

4. Act as financial shock absorbers of the economy.

Disadvantages of Credit Derivatives:

1. Market needs to be liquid to manage the risk.

2. New instrument keep appearing without tested.

3. Lead to increase leverage and risk taking by investors.

4. May not always channel risk those who handle it.