IMPACT safe. In the light of the Global

 

 

 

 

 

IMPACT OF CREDIT DERIVATIVES ON GLOBAL MARKETS

| ADITYA HARSHE | PGFS 2016-18
| ROLL NO. 21|

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CHAPTER 1:
INTRODUCTION

 

The perennial ?nancial institution instability in the global
market has emphasized the importance of counterparty risk in the
over-the-counter (OTC) derivative markets, as witnessed by the acute dif?culties
experienced by major market makers as well as other market participants. In
recent years, new instruments have transformed the global markets in credit
risk. The use of complex derivative products to manage counterparty risk have created
a web of opaque linkages across financial markets, which have created a
situation where market participants may be too big or interconnected to fail
and making the markets less safe. In the light of the Global Financial Crisis
of 2008-09, this report aims to assess the counterparty risk and study the rise
of Credit Derivatives in Financial markets, its impact on global market participants,
its role in Financial Crisis and the subsequent regulations and measures taken
by major economies to prevent another such event.

 This report will ?rst provide an overview of
the origins of Credit Derivatives and their rise to prominence. It will analyse
the Credit derivative market by looking at: the main products and their working
and use; historical developments; the main players; and the structure of the
market.

The second chapter will discuss the
benefits and hazards associated with products and sources of counterparty/credit
risk for Credit derivative instruments. The discussion will include the
following risks: wrong way risk; jump-to-default risk; liquidity risk;
concentration risk; and systemic risk.

The report will then assess the use
of credit derivatives instrument for hedging or trading purposes and their
impact on the economy. The Global Financial Crisis will be discussed and the role
of Credit Derivatives products in the Global Financial Crisis will be critiqued
in detail.

The report will further look into
development of Credit Derivative products in India context by discussing
following areas: historical development; products allowed; market participants;
regulatory structure.

The report will conclude with a
review of current market initiatives and regulatory initiatives for the Credit
Derivatives market made following the Global Financial crisis and suggested
next steps for market enhancement and stability by the industry.

 

 

 

 

 

 

CHAPTER 2: LITERATURE
REVIEW

 

CREDIT
DEFAULT SWAPS AND COUNTERPARTY RISK
European Central Bank, 2009

The report highlights the
importance of counterparty risk in the over-the-counter (OTC) derivative
markets over the ongoing ?nancial market turmoil. The role played by credit
default swaps (CDSs) has been the discussed impetus on CDS market and increased
?nancial contagion. The report sets out some features of the CDS market that
deserve attention for ?nancial stability purposes and on the basis of these ?ndings,
highlights a number of areas that may need to be considered by the regulators
like greater disclosure and transparency required for the assessment of
systemic risk.

 

CREDIT
DERIVATIVES:  AN OVERVIEW
David Mengle, Head of Research International Swaps and Derivatives
Association 2007 Financial Markets Conference, Federal Reserve Bank of Atlanta

The paper describes credit default
swaps, total return swaps, and asset swaps, but focuses mainly on the mechanics
and risks of credit default swaps. It then describes the market for credit default
swaps and how it evolved, followed by an overview of pricing and the risk
management role of the dealer.  Next, the
paper considers the costs and benefits of credit derivatives and describes some
recent policy issues.  The paper
concludes with a consideration of the possible future direction of the market.

 

CREDIT
DERIVATIVES, DISINTERMEDIATION, AND INVESTMENT DECISIONS
Alan D. Morrison, The Journal of Business, Vol. 78, No. 2 (March
2005)

This paper examines the
consequences for the real sector of disintermediation in debt markets by
specifically studying credit derivatives. The paper by the means of
mathematical model describes ?nancing and project selection decisions of a
market for credit derivatives.

 

GLOBAL
CREDIT DERIVATIVES MARKETS OVERVIEW: EVOLUTION, STANDARDIZATION AND CLEARING
Intercontinental Exchange, March 2010

This paper examines global credit
default swap (CDS) markets in the context of recent initiatives to improve
transparency, automation, regulation and market standardization. The paper
evaluates the role of CDS in global credit markets, financial market
dislocations, Market-supported regulatory reform, CDS market restructuring
initiatives and the results of these initiatives to date.

THE CREDIT
DERIVATIVES MARKET – A THREAT TO FINANCIAL STABILITY?
Roxana Angela Calistru, 8th International Strategic Management Conference
2012

This paper considers the benefits
of credit derivatives for risk management and the perils they pose for systemic
risk. The paper outlines the actions that should be undertaken in order to strengthen
the operational efficiency of credit derivatives markets so as to ensure that
they do not harm financial stability.

 

FINANCIAL INNOVATION AND THE 2008 CRISIS: LESSONS FOR THEORY AND POLICY
Michael G Jacobides, London Business School, February 7, 2014 

The paper studies the nature and
role of financial in driving the 2008 financial crisis, and to draw theoretical
implications from this analysis. Specifically, this paper looks at some
relatively neglected factors in the context of the financial sector. On the
basis of these factors it concludes on what drove the crisis. It  also 
helps  us  revisit 
the  lessons  we 
should  learn  from 
this  crisis,  shifting 
the  focus  from 
macroeconomic  factors  to 
the  role  of 
structure  and  feedback 
mechanisms.

 

CREDIT
DERIVATIVES: DID THEY EXACERBATE THE 2007 GLOBAL FINANCIAL CRISIS?
Walaa’ Ismael Alnassara, Eatessam Al-shakrchyb, Mahmoud Khalid Almsafira,
2nd World Conference on Business, Economics and Management 2013

This study explains the problems
associated with market participants in particular the large financial
institutions that were eminently involved the recent financial crisis.
Furthermore this paper presents a discussion of the blaming of hedge funds for
financial crisis by focusing on the American International Group which
blundering in the CDS market and causing system-wide instability, and argue the
company’s high efficient risk management and profuse diversity financial tools,
which insure financial institutions, could prevent sorts of financial risks. As
a result of AIG’s exposure analysis in CDS positions, it find CDS were key
contributor on igniting and exacerbation of current financial crisis.

 

GLOBAL
FINANCIAL CRISIS AND KEY RISKS:  IMPACT
ON INDIA AND ASIA
Rakesh Mohan, IMF-FSF High-Level Meeting on the Recent Financial Turmoil and
Policy Responses at Washington D.C. 
October 9, 2008

The report briefly set out reasons
for the resilience shown by the Indian economy to the ongoing international
financial markets’ crisis. It points out the impact till date on the Indian
economy and the likely implications in the near future. The approach to the
management of the exposures of the Indian financial sector entities to the
collapse of major financial institutions in the US is also discussed. Finally
the extent of vulnerability of the Asian economies, in general, to the global
financial market crisis is discussed in this paper.

 

CHAPTER 3: RESEARCH
METHODOLOGY

 

Through this thesis, my objective is to find out the overall
impact of Credit Derivatives products on the global economies. My aim is
to analyse the role of these products on the financial crisis of 2008-09 by
taking examples of large MNCs that collapsed. What measures were taken
thereafter by the economies to rectify the already present loopholes? The
implication of regulatory changes on market participants and the present
scenario of Credit Derivative market. What is the way forward for the industry?

 

Following are the steps I would be following throughout this
analysis:

·        
Understanding the working of different Credit
Derivatives products

·        
Understanding their use for risk management by
corporates

·        
Critically analysing the derivative product portfolio
of MNCs that led to financial crisis

·        
Correlating the financial regulations drafted in the
aftermath of crisis to causes of crisis

·        
Critiquing the present regulatory framework in Credit
Derivatives market

·        
Developing suggestions for financial industry for the
way forward

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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