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Credit DerivativesCredit derivatives, Securitization Securitizations , and Introduction to xVA

In: Capital Market Finance

Author

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  • Patrice Poncet

    (ESSEC Business School)

  • Roland Portait

    (ESSEC Business School)

Abstract

This chapter presents an overview of the credit derivatives and securitization technique used to transfer and manage the credit risk affecting most portfolios. Section 30.1 introduces in detail the main financial instrument dedicated to transferring credit risk, the Credit Default Swap, by which the two parties to the contract exchange a ‘default’ against fixed coupons. Section 30.2 provides a simple presentation of the securitization principle, which consists in transferring the credit risk of non-tradable assets present in one’s portfolio to external investors, and some techniques grounded on this principle. Section 30.3 introduces the notion of valuation adjustment. The initial adjustment, called Credit Valuation Adjustment (CVA), was introduced to account for the counterparty risk which captures the potential loss affecting the value of a derivative in case its counterparty defaults. Enduring disrupted market conditions earmarked the crucial role played by the presence of collateral in the valuation of derivatives, which gave rise to other valuation adjustments, encapsulated in the acronym xVA.

Suggested Citation

  • Patrice Poncet & Roland Portait, 2022. "Credit DerivativesCredit derivatives, Securitization Securitizations , and Introduction to xVA," Springer Texts in Business and Economics, in: Capital Market Finance, chapter 30, pages 1279-1346, Springer.
    • Handle: RePEc:spr:sptchp:978-3-030-84600-8_30
    DOI: 10.1007/978-3-030-84600-8_30
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