Like any other financial derivative, credit derivatives provide payoff to the investor that depends upon the underlying default risk associated with any financial instrument, especially bank loans.
Of late, the growth in credit derivatives market has been phenomenal, especially in the United States and in European countries.
Going by the British Bankers' Association Survey the global credit derivatives market comprised nearly $1 trillion as of year 2000. Probably the greatest motivation behind such a growth has been due to the gap between commercial banks and other financial institutions such as insurance companies, mutual funds and other non-banking financial institutions so far as conventional bank loan market is concerned.
Traditionally, the loan market -- which offers higher rate of return than many other assets available elsewhere in the market -- is not accessible to other financial institutions. …
