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Credit derivatives shot to fame, or rather ill-fame, during the 2007-2008 subprime crisis. Lots of critics all over the world have argued that credit derivatives, along with securitisation, were responsible for creating tremendous levels of leverage in the system, which ultimately caused the collapse of markets.
But this is like saying, if a rash driver driving a car killed someone, the blame should go to the car. No doubt, credit derivatives imply leverage, but leverage is a reflection of people's optimism and ambition. If market remain benign for a while, there will be no dearth of ways to extend leverage.
As a device that permits synthetic trades in generalised credit risk of entities, credit derivatives are an excellent tool.
- - Vinod Kothari's credit derivatives site -This site contains massive resources on credit derivatives.
- Credit default swaps in India - write up coming soon.
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