Derivative Market Credit

The derivative market credit is tailored to hedge credit risk or transferring credit risk. There are fifteen types of credit derivative that are traded in the derivative market credit.

1. Total Return Swaps
2. Credit Default Swaps
3. Credit Linked Notes
4. BSC Asset Swap
5. Bespoke CSO
6. Bespoke FTD
7. Bespoke CDS Index
8. Credit Default Swaption
9. Recovery Lock
10. Recovery Swap
11. TRS Basket
12. CDS Index
13. CDS Index Option
14. CDS Index Tranche
15. CMCDS

One must be accustomed with the following terminologies to know in details about the derivative market for credit.

Credit Linked Notes

The credit linked notes are bonds whose value depends on the value of the reference asset. The issuer of the Credit linked notes are generally trusts and the investor receives the par value unless the referenced credit defaults. The investor receives a recovery rate at the time of default. The credit linked notes are guaranteed by highly rated security like the US Treasury securities.

Collateralized Debt Obligation

The Collateralized Debt Obligation are securities backed by different kinds of assets. The Collateralized Debt Obligation comprises of a portfolio of bonds, loans and other fixed income securities. The Collateralized Debt Obligation issues four kinds of securities and they are senior debt, mezzanine debt, subordinate debt and equity. The CDOs that are backed by bonds are known as Collateralized Bond Obligations. The CDOs that are backed by leveraged loans are known as Collateralized Loan Obligations. The CDOs that are backed by assets are known as Structured Finance CDOs. The CDOs that are backed by residential or commercial mortgages are known as Collateralized Mortgage Obligation.

Baskets

By investing in a basket of credit derivatives the investor can basically diversify his portfolio and in the process reduce his risk level. There are also the first -to -default baskets where the investors lose on the principal whenever any one of the instruments in the basket defaults.

Leverage

The leverage is used to increase the returns on the funds that are invested. This high return is also accompanied by high risks.

For more knowledge about Derivatives market credit the websites to be viewed are credit-deriv.com, investopedia.com, finpipe.com, answers.com etc.