Chapter 5: Credit Derivatives

In this section

• Basics of Credit Default Swaps
  An in-depth exploration of Credit Default Swaps, their mechanics, pricing, and key risk management applications.
• Single-Name, Index, and Basket Swaps
  Explore the essential features, mechanics, and risk management of Single-Name, Index, and Basket CDS, complete with real-world examples and interactive diagrams.
• Total Return Swaps and Credit-Linked Notes
  Explore how Total Return Swaps (TRSs) and Credit-Linked Notes (CLNs) provide synthetic credit exposure, regulatory capital relief, and unique risk transfer opportunities in the world of credit derivatives.
• Uses and Risks of Credit Derivatives
  Explore the practical applications, hedging benefits, speculative strategies, and core risks of credit derivatives like credit default swaps, focusing on how and why institutions use them.
• Credit Events and Settlement Mechanisms
  Explore how credit events are defined under ISDA provisions, and examine the mechanisms by which credit derivative contracts—especially CDS—settle once a credit event is triggered.
• Credit Spread Options
  Learn how credit spread options provide investors with a targeted way to hedge or speculate on credit spread movements, including key concepts, payoff structures, valuation considerations, and practical applications in real-world portfolios.
• Credit Derivatives in Emerging Markets
  Discover how credit derivatives in emerging markets offer unique opportunities and challenges for sovereign and corporate debt exposure, with insights into liquidity, risk management, and practical trading considerations.
• Correlation and Risk in Credit Portfolios
  Explore how default correlation shapes the risk profile of multi-name credit derivatives and structured products, and discover practical modeling techniques for portfolio management.
• Synthetic CDO Structures
  Discover how credit risk is packaged, transferred, and leveraged in synthetic CDOs using credit default swaps, exploring tranching, risk mitigation, and lessons from the 2008 crisis.
• Credit Valuation Adjustment (CVA) for Credit Derivatives
  A comprehensive exploration of CVA for credit derivatives, focusing on default probabilities, exposure, and recovery, along with practical cases, best practices, and exam tips for CFA® 2025 Level I candidates.
• Regulatory Capital Requirements for Credit Derivatives
  In-depth exploration of Basel III guidelines and risk-weighted assets for credit derivative exposures, focusing on capital adequacy, CRM, and CVA charges.
• CDS Index Tranches
  Discover how CDS index tranches partition credit risk, explore attachment and detachment points, and understand correlation-driven pricing in this comprehensive guide for CFA candidates.
• CDS on Asset-Backed Securities
  Discover how market participants utilize Credit Default Swaps on Asset-Backed Securities for hedging and exposure to structured finance tranches.
• Counterparty Exposure in CDS Trading
  Explore how bilateral OTC structures, collateral management, and clearing mechanisms mitigate credit default swap counterparty risks.
• Use of Credit Derivatives in Securitization
  Explore how credit derivatives facilitate synthetic securitizations, enhance balance sheet management, and create tailored credit exposures in modern financial markets.