The Development Of Credit Derivatives Market In Foreign Countries And Its Introduction To China

Credit derivatives are financial innovation products born in the beginning of 1990s. They not only have led to the transformation of credit risk management, but also will have a profound influence on the structure and efficiency of financial market. This paper aims at analyze the development ot foreign credit derivatives market, the influence of such market to credit risk management and financial market, the pricing of credit derivatives, and the necessity and feasibility of introducing credit derivatives market to China, in order to give some suggestions on the application of credit derivatives to improve the credit risk management of China's banks.This paper is composed five parts. The first chapter "An introduction to credit derivatives" explains the four basic credit derivatives (credit default swaps, total return swaps, credit spread options and credit-linked notes), as well as their attributes and functions. The second chapter "The development of credit derivatives markets" not only analyzes the present development of credit derivatives market, but also attaches special importance to the trend and obstacles of market development. The third chapter "The effects of credit derivatives market and their supervision" stresses the contribution of credit derivatives to credit risk management, and compares their double-sword effects to financial market, such the redistribution, of credit risk, the problem of adverse selection and moral hazard, high risk concentration, and distortion of default information. This chapter also studies the risk of credit derivatives market the regulation problem. The fourth chapter "The pricing of credit derivatives" introduces several widely used pricing models such as models based on default probabilities, on collateralised products and on reconstructing cost. The last chapter "Study on the construction of China's credit derivatives markets" illustrates the urgency and feasibility of introducing credit derivatives market to China after a detail analysis of the credit risk perspective of China's banks, current conditions and potential risk, and at last explores the steps of such process.The paper holds that credit derivatives have a huge potential in the domain of credit risk management though the market is not premature and still have some risk and negative effects. As a result, it would be of great significance to improve the credit risk management of China's banks by the use of credit derivatives. Finally, the paper proposes the strategy of constructing China's credit derivatives market based on its analysis of domestic credit risk: we could first encourage credit derivatives transaction between domestic banks and foreign banks in or out of China, then promote the markets between domestic banks, and finally develop markets between domestic banks and domestic institutional investment companies. The successful construction of domestic credit derivatives markets depends on the deepening of China's market economy reform and financial reform.