Research For The Problem Of Asymmetry Information In The Bargaining Of Credit Derivatives

The finance storm taken place at the end of the last century suggested that credit risk is still first risk of bank. Banks have two ways to manage credit risk. One is credit risk catabatic technic, the other is risk capital for credit risk. Using credit derivatives transferring credit risk is a credit risk catabatic technic developed in the last decade. Credit derivatives is a two-way financial contract. In this contract, the two parties agree to exchange cash flow which is associated with a given credit event in scheduled term. Credit derivatives market has developed rapidly in the recent. At the same time, there is asymmetry information in the bargaining of credit derivatives. Asymmetry information will cause adverse selection and moral hazard, at last, it will lead invalidation of market. So we should research how to decrease asymmetry information in the bargaining of credit derivatives.This paper discusses how to decrease asymmetry information in the bargaining of credit derivatives. Firstly, we consider that more increase in investigation of the firm' s condition doesn' t always decrease adverse selection in the bargaining of credit derivatives. It is taken for granted that more increase in investigation of the firm' s condition is sure to decrease adverse selection. Is this kind of viewpoint right? We may come to the conclusion by the analysis with making one model that this kind of viewpoint does not always work. When credit risk buyer enhances the price of credit derivatives, more increase in investigation will not always decrease adverse selection. When credit risk buyer doesn' t enhance the price of credit derivatives, more increase in investigation will decrease adverse selection. Secondly, we come to the conclusion that one preferable reputation mechanism with given pricing strategy can decrease adverse selection in the bargaining of credit derivatives. Finally, we analyze with making one model the factor that influence grade of moral hazard in the bargaining of credit derivatives. Moreover, we put forward some measures to decrease moral hazard in the bargaining of credit derivatives.